The effect of investor protection on forced CEO turnover

Abstract

Purpose This paper aims to analyze the direct and indirect effects of investor protection on forced CEO turnover. Design/methodology/approach The authors investigate 5,175 firm-year observations from 16 European countries over 2012–2018, collect data on four national investor protection indicators, identify 196 forced CEO turnovers and use multiple logistic regression models. Findings The results show that a reduction in the degree of investor protection significantly increases the probability of a forced change of the company’s CEO. Furthermore, when the degree of investor protection increases, directors are attributed a lower degree of responsibility in the event of a decline in earnings performance. Therefore, the relation between a decrease in profitability and a forced change of CEO is reduced. Research limitations/implications The research is focused on countries belonging to the European Economic Area and most of the investor protection indicators are derived from surveys. Concerning policy implications, the findings suggest that regulators should focus on the effective enforcement of investor protection mechanisms. Social implications The results confirm that characteristics at the country level have an impact on corporate decisions, highlighting the importance of increasing the degree of investor protection as a means of mitigating agency conflicts and improving stewardship. Originality/value To the best of the authors’ knowledge, this study explores a relatively underinvestigated topic as it uses investor protection indicators to jointly evaluate both direct and indirect effects on forced changes of CEO through cross-national research.