Change in Corporate Performance after Forcing Out CEOs: Comparison between the United States and Japan

The objective of running the corporation is a crucial determinant of firm performance. This study investigates the direction of corporate management in the United States and Japan where internal governance structures distinctively differ. Top managers in U.S. firms are exposed strongly to the pressure of maximizing firm value with outsider-dominant boards and market-based shareholders. On the other hand, the target of corporate management in Japanese firms might deviate from performance maximization due to insider-dominant boards and relation-based shareholders.

We explore the change in corporate performance and policies surrounding chief executive officer (CEO) forced turnover events from 2000 to 2007. Replacement of CEOs is directed by internal governance force such that the outcomes by CEO forced turnover are likely to reflect the target of corporate management. We find that CEO forced turnover is led by return on assets (ROA) deterioration in both the United States and Japan, and is followed by ROA improvement only in the United States. Post-turnover ROA pickup is accompanied by substantial consolidation: U.S. firms reduce their assets and labor force by a magnitude of 6-8 times more than Japanese firms. Leverage drops significantly after CEO forced turnovers in Japanese firms. Overall results imply that internal governance in U.S. firms is more subject to firm performance maximization.