CEO Turnover and Ownership Structure: Evidence From the U.S. Property–Liability Insurance Industry

ABSTRACT This article examines the impact of ownership structure on the relation between firm performance and chief executive officer (CEO) turnover in the U.S. property--liability insurance industry. Theoretical implications of stock versus mutual ownership structures on the performance-turnover relation are ambiguous. Our empirical results indicate that CEO turnover is less responsive to firm underwriting performance in mutual insurers compared to stock insurers. In fact, we find that while CEO turnover for stock firms is negatively related to prior performance, no such relationship is found for mutual insurers. These results hold while controlling for board structure and other relevant factors. INTRODUCTION The issue of chief executive officer (CEO) turnover has received significant attention in the academic literature. The reason for this attention is that the study of CEO turnover can shed light on the broader issue of corporate governance. Jensen and Warner (1988) characterize top executive changes as a "key variable in understanding the forces disciplining managers" (pp. 19-20). Of the large body of research on the relation between firm performance and management turnover, the vast majority focuses exclusively on publicly traded firms. Very few studies have been performed investigating CEO turnover in firms with alternative ownership structures (e.g., Brickley and Van Horn, 2002; Coles, Lemmon, and Naveen, 2003). The main reason for this lack of study is the difficulty in obtaining data on firms that are not publicly traded. The U.S. property-liability insurance industry provides fertile ground for investigation in this area. The industry exhibits a variety of ownership structures, and due to regulatory requirements and the data collected by insurerrating agencies, detailed financial and management data are available for individual insurance firms regardless of ownership structure. In this article, we exploit this detailed information to examine how managers are monitored under different ownership structures by investigating CEO turnovers in mutual and stock insurance companies. A prominent characteristic of the U.S. property-liability insurance industry is the coexistence of both stock and mutual firms. Implications of these two ownership structures on corporate control of managers are ambiguous. The managerial discretion hypothesis argues that mutual insurers focus on activities requiring relatively less managerial discretion. On one hand, this implies that the cost of replacing CEOs in mutual companies is less than that in stock firms, leading to a prediction of a stronger sensitivity of CEO turnover to firm performance in mutual companies than in stock firms. On the other hand, however, the lesser managerial discretion required from managers in mutual companies could also lead to a prediction of a weaker sensitivity of CEO turnover to firm performance in mutual firms. If managers of mutual firms have relatively less discretion over their operations and thus have relatively less ability to shift the distribution of cash flow outcomes to the right, then the turnover-performance sensitivities would be expected to be lower in mutual companies than in stock companies. Finally, the managerial entrenchment hypothesis suggests that corporate control is less effective in disciplining mutual managers as compared to those of widely held stock companies, because mutual managers are subject to substantially fewer control mechanisms. From this perspective, one would also expect less responsiveness of CEO turnover to firm performance in mutual insurers compared to stock insurers. Consistent with the latter implication of the managerial discretion theory and the managerial entrenchment hypothesis, our major findings are: (1) when measuring performance with underwriting return on assets (ROA), nonroutine CEO turnover is less responsive to firm performance in mutual insurers than in stock insurers, and (2) when separating the sample into stock and mutual subsamples, we find that nonroutine CEO turnover for stock firms is negatively related to prior performance, but no such relationship is found for mutual insurers. …