Jana P. Fidrmuc

Fire the Manager to Improve Performance? Managerial Turnover and Incentives After Privatization in the Czech Republic

This Paper analyses the effect of the introduction of managerial incentives and new human capital on enterprise performance after privatization in the Czech Republic. We find weak evidence for the presence of managerial incentives: only in 1997, three to four years after privatization, does poor performance significantly increase the probability of managerial change. Nevertheless, replacing the managing director in a newly privatized firm improves subsequent performance. This indicates that the privatized firms operate below potential under the incumbent management. We show that the institutional framework matters as well: managerial turnover improves performance only if the management is closely interconnected with the board of directors and thus holds effective executive authority.

Channels of Restructuring in Privatized Czech Companies

The main contribution of this paper to the literature on restructuring in the transition economies of Central and Eastern Europe is the analysis of productivity-growth effects for different channels of restructuring. It examines a panel of 737 voucher-privatized Czech companies in the first years after the transfer of ownership (between 1993 and 1998). The results indicate that asset sales and employee incentives serve as restructuring channels through which productivity of the privatized companies increases. The analysis also indicates that capital expenditures, labour shedding and CEO replacements are not significantly correlated to productivity growth. Furthermore, the analysis suggests that the availability of bank loans is positively associated with productivity growth, but not for less profitable firms. This provides some evidence in support of soft budget constraints accommodated via bank lending.

The Effect of Ownership Structures on Managerial Disciplinary Mechanisms after Privatization in Slovakia

In established market economies, firm performance has typically a strong effect on the CEOs tenure in the firm, which suggests effectiveness of the internal governance structures. This paper analyzes CEO turnover and its sensitivity to poor firm performance after privatization in a transition country. Using data over 1995-1998 on state-owned enterprises privatized in the large-scale privatization in Slovakia, the analysis shows that poor profitability is indeed associated with higher CEO turnover suggesting that the transfer of ownership from state to private hands had enhancing effect on the effectiveness of the internal monitoring efforts. In contrast, a market performance measure does not perform such a disciplining role. The second important finding is that concentration and nature of ownership as well as changes of major blockholders have also important impact on both CEO turnover and its sensitivity to poor firm performance.

Hedge Fund Activism and CEO Compensation

Applying a difference-in-differences approach, we document the effect of hedge fund activism on the corporate governance of target firms through the channel of CEO compensation. We hand-collect data on managerial pay for a sample of 244 U.S. publicly-listed firms that were targets of activist hedge funds from 2009 to 2011, and their corresponding 244 industry, size and book-to-market matches. We find that target CEOs receive higher stock and total compensation, as compared to their peers, prior to an activists entry. The entry of hedge fund activists results in a decline in target CEO pay to levels prevalent at matched firms. This decrease is not because target CEOs are extracting rents before activism, since CEO pay at target firms prior to activism is sensitive to firm performance. Instead, we show that the entry of hedge fund activists results in a decline in the pay-for-performance sensitivity of CEO stock awards and total pay at target firms. Our findings suggest that incentive compensation and monitoring by activist hedge funds act as substitutes in motivating CEOs to improve firm value.