articol UCRAINA Eastern European Economics.pdf

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Eastern European Economics vol. 48, no. 2,March–April 2010, pp. 5–24.

© 2010 M.E. Sharpe, Inc. All rights reserved.ISSN 0012–8775 / 2010 $9.50 + 0.00.DOI 10.2753/EEE0012-8775480201

A LEXANDER M URAVYEV , O LEKSANDR T ALAVERA ,O LGA B ILYK , AND B OGDANA G RECHANIUK

Is Corporate Governance Effective inUkraine?A Crude Test Using Chief Executive OfcerTurnover Data

ABSTRACT: This paper studies whether and how chief executive ofcerturnover in Ukrainian rms is related to their performance. Based on anovel data set covering Ukrainian joint stock companies from 2002 to 2006,the paper nds a statistically signicant negative association between the

past performance of rms, measured by return on sales and return on as-sets, and the likelihood of managerial turnover. Whereas the strength of theturnover–performance relationship does not seem to depend on factors suchas managerial ownership and supervisory board size, we nd signicantentrenchment effects associated with ownership by managers. Overall, ouranalysis suggests that corporate governance in Ukraine operates with acertain degree of efciency, despite the well-known lacunas in the country’sinstitutional environment.

Alexander Muravyev is a research associate at the Institute for the Study of Labor (IZABonn), research afliate at the German Institute for Economic Research (DIW Berlin), andresearch fellow at St. Petersburg University Graduate School of Management. OleksandrTalavera is a lecturer at the University of East Anglia. Olga Bilyk and Bogdana Grechaniuk

are research fellows at the Kyiv School of Economics. Bilyk and Grechaniuk acknowledgenancial support by the Economics Education and Research Consortium (EERC), EERCGrant no R07-0832 The authors are grateful to EERC experts as well as participants of



6 EASTERN EUROPEAN ECONOMICS

When economic transformation began in Eastern Europe in the late 1980s, bothacademics and policymakers initially focused on macro-level issues, such as mac-

roeconomic stabilization, liberalization of prices and foreign trade, and privatiza-tion—the standard set of Washington Consensus reforms. After less than a decade,there was a remarkable shift in attention from this initial agenda to the need to llinstitutional gaps inherited by transition countries from the era of socialism (Mitraet al. 2008). There was a growing awareness that, at a micro level, the success ofthe economic reforms would be determined to a large extent by the emergenceof effective corporate governance—mechanisms that would, in turn, promote therestructuring of formerly state-owned enterprises and eventually contribute to theirimproved performance (Dyck 2001).

As in developed market economies, corporate governance problems facingtransition countries stem from the separation of ownership and control and thedivergence of the interests of principals (shareholders) and agents (managers).Without well-functioning governance mechanisms, managers may expropriateinvestors’ funds, engage in empire building, or simply live an easy life (Shleiferand Vishny 1997). Among various corporate governance mechanisms that ensuremanagerial discipline, the managerial labor market is key. Performance-basedcompensation schemes encourage managers to maximize prot and shareholdervalue, whereas the threat of dismissal prevents them from shirking or expropriat-

ing investors’ funds.The corporate governance problem has had an extra dimension in transition

countries. During the socialist period, managers of state enterprises were appointedfor adhering to the state-supported ideology or because they were procient inlobbying the government for credits and securing delivery of inputs (Shleifer andVasiliev 1996). In the 1990s, most of these skills became of little or no value andmany managers’ lack of ability became apparent. In other words, the countries ofEastern Europe entered the transition period with considerable mismatch betweenmanagerial talent and productive assets (Roland 2000). Existing managers’ lack of

ability and entrenchment raised concerns about whether introducing appropriateincentives could positively affect enterprise restructuring and performance. It is quitepossible that the governance problems could not be resolved without replacing theincumbent preprivatization managers rst (Fidrmuc and Fidrmuc 2006).

Such factors explain both academics’ and policymakers’ interest in the func-tioning of the managerial labor market in transition countries. Managerial payand performance, factors triggering dismissal of incumbents and appointments ofinside versus outside successors, as well as the effect of managerial turnover onenterprise performance, are among the topics that have stayed high on the research

agenda in the region. The empirical research remains, however, hampered by thelimited availability of data, apart from a few relatively well-studied countries, such



MARCH–APRIL 2010 7

tion economies. It is the only state in Eastern Europe that experienced a prolongeddecline from 1991 to 1999, with gross domestic product (GDP) falling by nearly

60 percent, according to the European Bank for Reconstruction and Development(EBRD 2001). It also introduced very few reforms in the 1990s; it is known forslow, convoluted, and politicized privatization (Estrin and Rosevear 2003). A soundlegal framework regulating the creation and operation of corporations—the core ofmodern economies—was established in Ukraine only in 2008, with the adoptionof its law on joint stock companies. Before that, the legal basis consisted of largelyoutdated acts (e.g., the law on economic associations) that were adopted in the1990s. The weak legal framework, combined with ineffective enforcement of law(see Pistor et al. 2000), raised considerable concerns about the quality of corporate

governance in the country. Indeed, as Schnytzer and Andreyeva (2002, 83) suggest,Ukrainian rms in 1998 still behaved as if they were “in a loosely reformed Sovietenvironment where exchange via interpersonal connections, rather than the pricemechanism, determined the allocation of resources.”

This paper examines a particular aspect of corporate governance in Ukraine:the sensitivity of managerial turnover to the past performance of rms. Such ananalysis can be regarded as a test of the overall efciency of corporate governancein the country (Gibson 2003). An effective corporate governance system requiresthat badly performing incumbents be systematically replaced by new, more skilled,

and better motivated managers. In addition, we examine how managerial turnoveris related to several other factors, such as managerial ownership, supervisory boardsize, leverage, and liquidity of rms. The role of corporate boards is of particularimportance because regulations concerning board size and the exact distribution ofpower between corporate boards and shareholders’ meetings have been a subjectof intense debates among academics, policymakers, and practitioners.

Using a new data set on Ukrainian joint stock companies, which we assemblefrom companies’ reports to the regulator—the State Commission on Securitiesand the Stock Market—we nd evidence of an inverse relation between the past

performance of companies and the likelihood of managerial turnover. This resultis robust to a number of important factors, such as rm size, leverage, liquidity,and supervisory board size, as well as important characteristics of chief executives,such as experience and gender. We also nd that greater managerial ownershipreduces chief executive ofcer (CEO) turnover, suggesting entrenchment effects.However, there is no evidence in the data that managerial ownership affects thestrength of the turnover–performance relationship. The same is true of the size ofsupervisory boards. Overall, our analysis suggests that Ukraine passes the crude testof the efciency of corporate governance, despite all the institutional weaknesses

accompanying the country’s transition process.




(Coughlan and Schmidt 1985; Jensen and Murphy 1990; Warner et al. 1988; Weis-bach 1988). These and other studies have established an inverse relation between

the likelihood of managerial turnover and past corporate performance in a numberof developed economies, most notably the United States and the United Kingdom.Further research shows that the performance–turnover relation is inuenced byboard size (Yermack 1996), board composition (Weisbach 1988), and ownership(Kang and Shivdasani 1995; Lausten 2002). Dismissals of CEOs are found to leadto positive abnormal stock performance (Denis and Denis 1995), especially whenoutside successors are appointed as new managers (Rosenstein and Wyatt 1997).

Summarizing the available evidence, Djankov and Murrell (2002) suggest thatmanagerial turnover is almost always effective in improving enterprise performance

in Western countries. For transition and emerging economies, however, the pictureis less clear, as many institutions of corporate governance remain underdeveloped.A clear link between enterprise performance and managerial turnover may notexist in transition countries due to imperfect protection of property rights, under-development of the nancial market, or state intervention (Muravyev 2003b). Howthe managerial labor market operates in these economies remains, therefore, aninteresting and important empirical question (Gibson 2003).

Some evidence suggests the importance of new managerial human capital forenterprise restructuring and improved performance in transition countries. One

early study of the effect of managerial turnover on corporate performance is thatof Barberis et al. (1996). Using a survey of 452 Russian privatized shops, they ndthat the presence of new management matters for restructuring, measured by shoprenovations, supplier changes, store hours increases, and layoffs. Claessens andDjankov (1999) report that, for the Czech Republic, appointing new managers in1993–97 is associated with improving corporate performance measured by protmargins and labor productivity. The result is particularly strong if new managersare selected by private owners rather than by government ofcials. Fidrmuc andFidrmuc (2007) report that replacing a CEO in a newly privatized rm improves

rm performance in the Czech Republic.Another strand of literature looks at the relation between rms’ past performance

and the likelihood of senior management turnover. Gibson (2003) focuses on thelink between corporate performance and CEO turnover using a sample of over1,200 nonnancial rms in eight emerging markets—Brazil, Chile, India, Korea,Malaysia, Mexico, Taiwan, and Thailand. He nds that the probability of CEOturnover rises with poor rm performance, suggesting that corporate governancein the selected emerging markets is effective. Eriksson (2005) nds some evidencethat poor corporate performance in the Czech Republic and Slovakia also results in

a higher likelihood of managerial turnover. Fidrmuc and Fidrmuc (2007) report asimilar relation for Czech rms, but only three to four years after their privatization.




and nancial constraints are associated with higher rates of managerial turnover.Reporting similar results, Kapeliushnikov and Demina (2005) identify three main

determinants inuencing CEO turnover in Russia: ownership structure, controlchanges, and nancial performance. Interestingly, Kapeliushnikov and Demina(2005) nd that outside succession is driven by poor performance, whereas Mu-ravyev (2003b) reports a higher probability of outside succession in rms with ahigher return on equity.

An important issue in most of these studies is the distinction between voluntarydepartures and forced resignations of managers (Hermalin and Weisbach 2003).Distinguishing among the different reasons for CEO change is problematic, andmany studies disregard these differences because the relevant information is

unavailable. An argument for ignoring the differences is that when a negativeperformance–turnover link is detected in the overall sample (e.g., covering routineturnover, voluntary leaves, and forced resignations), it is still likely to be drivenby ring for poor performance. Routine turnover is hardly related to performance,and it is far from obvious why poor performance should trigger CEOs’ voluntarydepartures. Overall, there seems to be a consensus in the literature that a negativeperformance–turnover relation reects boards ring CEOs (Hermalin and Weis-bach 2003). 1

For Ukraine, the evidence concerning the performance–turnover relation is

limited. Warzynski (2003) is a notable exception in this respect. Based on surveydata covering 300 Ukrainian rms, it analyzes the determinants and consequencesof managerial change, as well as the role of privatization and competition in im-proving company performance. He nds some evidence that nancial difculties inprivate—though not state—rms results in a higher probability of CEO departure.The study also suggests that managerial change and privatization have a positive

joint effect on protability, though the individual effects appear to be insignicant.Warzynski’s (2003) study has several weaknesses, stemming largely from the na-ture and quality of the data. First, the sample size is relatively small and data are

obtained for two Ukrainian regions only. More important, the study does not useaccounting information; performance is measured from qualitative assessments ofrespondents, who are asked if their rms faced nancial difculties shortly beforethe interviews. The reliability of such subjective data on company performanceis unclear, raising substantial concerns about the main ndings of the study. Thispaper attempts to ll this gap in the research.

Methodology

Performance Measures




enterprise performance in transition economies to place less emphasis on indicatorsbased on capital stock, assets, or equity.

The use of Tobin’s Q, a traditional measure of the expected long-run performanceof rms, is virtually ruled out in the transition context because of the absence, or avery limited role, of stock markets. There are also problems associated with usingtotal factor productivity, owing to the low reliability of capital stock data. Impreciseestimates of capital coupled with endogeneity of prot plague protability ratios,such as return on equity. 2 These difculties lead researchers studying enterpriseperformance in emerging and transition countries to adopt indicators that are lesscommon in the context of developed economies. Bevan et al. (1999) consider theshare of exports in sales to be particularly useful in indicating enterprise perfor-

mance in a transition environment. Gibson (2003) uses accounting measures ofperformance, such as earnings before interest, taxes scaled by assets, change inearnings scaled by lagged assets, and growth in sales. Warzynski (2003) employsa rather peculiar performance measure, a dummy that indicates if a rm facednancial difculties in the preceding period, according to managers’ subjectiveresponses, whereas Barberis et al. (1996) consider a range of restructuring indices,such as shop renovations. A number of studies use labor productivity as the mostsuitable performance measure (e.g., Earle 1998; Kouznetsov and Muravyev 2001);however, this measure is appropriate for short-term analysis only, as it implicitly

assumes that the level of capital remains unchanged.Given that each performance indicator has its own particular advantages and

disadvantages, we use several indicators instead of choosing and defending a singleone. We focus on labor productivity (LP), returns on sales (ROS), and returns onassets (ROA). We deliberately omit returns on equity (ROE), which can easily becomputed from the data, as in the data we have, there are more than 100 rms that,according to their balance sheets, have negative equity; 3 if such a rm reports lossesin the last nancial year, one obtains a positive value of ROE from the division ofone negative number (nancial loss) by another one (negative equity). Clearly, the

calculated positive value has nothing to do with the actual performance of the rm.Although there are credible concerns about the other measures of performance,including labor productivity, ROS, and ROA, we believe that the magnitude ofpossible accounting distortions is much smaller in these cases.

Econometric Models

We focus on the link between CEO turnover on the one hand and rm performanceon the other. The outcome in our analysis can be represented by a dichotomous

variable that equals one in case of CEO dismissal between two adjacent years andzero otherwise. Because of the binary outcome variable, we use the logit model to




where i indexes rms; t denotes time; C it is a binary variable for a change in CEObetween years t – 1 and t ; Performance t– 1 is a measure of rm performance in period

t – 1; X it –1 is a vector of control variables that characterize rms and their manag-ers; α , β, and γ are unknown parameters to be estimated; and Λ is the cumulativedensity function of the logistic distribution. The parameter of interest is β, whichwe expect to be negative.

Based on previous studies of determinants of managerial turnover, we include anumber of characteristics of rms and their managers in vector X . First, we includea variable measuring the size of a company’s supervisory board, the mechanismthat is empowered to monitor managers and re them for poor performance. Theoptimal size of the board has been a subject of controversy in the literature (e.g.,

Jensen 1993). Second, we include measures of leverage and liquidity, which aresupposed to control for rms’ nancial constraints. High leverage or low liquidityare likely to increase the probability of bankruptcy, and the threat of bankruptcy maycause higher CEO turnover. Third, we include rm size, measured by the naturallogarithm of total assets or by the natural logarithm of employment. This variableis highly relevant in our analysis, as larger rms may have a bigger pool of internalsuccessors for a departing manager so that these rms face smaller costs of ndinga new CEO. Fourth, we include chief executives’ ownership stakes. We expect thatmanagerial ownership inhibits managerial turnover by promoting, ceteris paribus,

entrenchment of the incumbents. 4 Fifth, we include the gender of managers. Thereis growing attention in the corporate nance literature to the gender composition ofcorporate boards and the gender of chief executives (Francoeur et al. 2008; Rose2007). The interest is sparked by the existence of differences between men andwomen, for example, in risk aversion, which may translate into different behavioras directors and managers (Schubert et al. 1999; Stelter 2002). We hypothesizethat boards may have a gender bias in evaluating CEO performance and thereforeinclude a dummy variable indicating CEOs’ gender in our econometric model.Sixth, we include managerial experience (number of years of work on manage-

rial positions) and age. Managers’ experience is another important variable in ouranalysis that may help shed more light on the role of managerial human capital.On the one hand, managerial experience, which characterizes accumulation ofprofessional knowledge and acquisition of managerial techniques, may be a valu-able asset to the rm. On the other hand, greater managerial experience, ceterisparibus, implies older managers who may have insufcient ability to run rms ina market environment if many of their skills were acquired in the Soviet era. Weinclude both managerial age and experience in our regressions to separate theseeffects. Finally, we include industry and region xed effects, represented by a set

of dummy variables. 5

A potentially interesting extension of the baseline analysis lies in augmenting




by interacting performance with managerial ownership, board size, and industryafliation of rms.

Data and Sample Description

Our empirical analysis employs a recently established database of Ukrainian jointstock companies maintained by the country’s regulator, the State Commission onSecurities and the Stock Market. The commission collects essential informationabout companies and makes it publicly available on its Web site. 6 The databasecovers over 7,000 rms, with the earliest records available in 2001. The data containdetailed nancial information about rms, including annual balance sheets and

income statements, information on ownership and governance structures, industryafliations, numbers of employees, and locations. There are also data on rms’ chiefexecutives, including names, gender, and tenure on managerial positions.

The estimation sample for our empirical analysis is constructed from these datain several steps. First, we restrict the sample to open joint stock companies, drop-ping all observations pertaining to closed joint stock rms. One reason for such adecision is restrictions on transferability of shares in closed corporations, whichmay have implications for managerial turnover. 7 More important, the disclosurestandard for closed joint stock companies is less demanding than for open corpo-

rations, resulting in the unavailability of essential data about the former type ofrms. Second, because we want to relate changes in CEOs between the currentand preceding periods to companies’ performance in the preceding period, we onlykeep observations with complete data in the current and preceding nancial years.The nal sample includes 916 companies with a total of 3,012 observations overa ve-year period from 2002 to 2006. 8

We attempt to trace the exact reasons underlying turnover of CEOs in Ukrainianrms because of the unavailability or poor quality of relevant information. Eventhough we can exclude twenty-two admittedly routine changes in CEOs from the

nal estimation sample, our paper essentially follows the standard approach in theliterature that does not distinguish among different types of separations (Hermalinand Weisbach 2003).

Table 1 contains descriptive statistics of the variables used in the empiricalanalysis. Rather surprisingly, Ukrainian joint stock companies appear to be, onaverage, unprotable, as the mean values of ROA and ROS are negative. The othernancial ratios show that rms are, on average, nancially stable. The ratio of debtto equity is 1:2, and rms’ current liabilities are covered by working capital morethan three times. Chief executives, on average, are fty years old and have eighteen

years of experience in managerial positions. Supervisory boards consist of threeto four members on average.




Firms with no change in CEO are more frequently headed by executives who aremale, older, and more experienced than managers of rms in the complementarygroup. The mean experience of managers is nineteen years in the former group and

only sixteen years in the latter group.Managerial turnover is more typical for larger rms, which also have somewhat

Table 1. Descriptive Statistics for Sample Used in Logit Regressions

StandardVariable Denition Mean deviation

CHANGE Equals one if change takes place in 0.102 0.302 this periodFEMALE Equals one if female 0.090 0.286EXPERIENCE Number of years of experience in 18.245 9.809 executive positionAGE CEO age 50.319 8.876BOARD Number of members on the 3.483 1.737 supervisory boardSHARE Share ownership of CEO 11.733 18.557LEVERAGE Ratio of debts to assets 0.327 0.279LIQUIDITY Ratio of working capital to 3.379 4.593 short-term debtsASSETS Firm’s assets in million UAH 26.899 69.153LABOR Number of people employed 319.506 559.583ROA Ratio of net prot to assets –0.009 0.089ROS Ratio of net prot to sales –0.054 0.183LP Ratio of sales (million UAH) to 0.062 0.078

number of employedBOARD*ROA Interaction of board size and ROA –0.032 0.308BOARD*ROS Interaction of board size and ROS –0.180 0.633BOARD*LP Interaction of board size and LP 212.966 291.815SHARE*ROA Interaction of share ownership of –0.015 1.236 CEO and ROASHARE*ROS Interaction of share ownership of –0.239 1.709 CEO and ROSSHARE*LP Interaction of share ownership of 556.198 1,151.805

CEO and LP

Notes: Descriptive statistics are based on 3,012 observations. All rm-level variablesexcept CHANGE are lagged. UAH = Ukrainian hryvnia.




facing companies and managerial turnover. Managers of high-leveraged rms aremore likely to lose their jobs, even though these rms may be more protable, asthe corporate nance literature suggests.

Overall, the univariate analysis reveals substantial differences in the character-istics of the two groups of rms. The multivariate regression analysis that followswill help to explain the interplay among these various factors and CEO turnover,the main outcome of interest.

Regression Results

Table 2. Descriptive Statistics of Variables, by CEO Turnover

Firms without CEO Firms with CEO turnover during turnover during period under period under consideration consideration (2,004 observations) (1,008 observations)

Standard StandardVariable Mean deviation Mean deviation p -value

FEMALE 0.081 0.274 0.108 0.308 0.030EXPERIENCE 19.256 9.542 16.234 10.025 0.000AGE 51.488 8.370 47.996 9.385 0.000BOARD 3.409 1.691 3.632 1.816 0.001SHARE 15.198 20.519 4.844 10.993 0.000LEVERAGE 0.297 0.265 0.388 0.296 0.000LIQUIDITY 3.617 4.747 2.906 4.233 0.000ASSETS 19.487 55.437 41.636 88.651 0.000LABOR 257.212 453.906 443.354 709.509 0.000ROA 0.000 0.085 –0.026 0.093 0.000ROS –0.042 0.174 –0.078 0.197 0.000LP 56.986 68.852 79.992 93.701 0.000

BOARD*ROA –0.003 0.292 –0.089 0.329 0.000BOARD*ROS –0.141 0.605 –0.259 0.679 0.000BOARD*LP 188.880 249.833 260.850 356.402 0.000SHARE*ROA 0.089 1.382 –0.132 0.861 0.000SHARE*ROS –0.218 1.849 –0.283 1.390 0.343SHARE*LP 700.665 1,254.331 268.983 844.496 0.000

Notes: The last column shows p-values from the t -test for the equality of means in thetwo groups of rms. See Table 1 for variables denitions.




analysis focuses on three measures of performance: ROA, which is the ratio of netprot to assets; ROS, which is the ratio of net prot to sales; and labor productivity

(LP), which is the ratio of sales to the number of workers employed.In addition to the main regressor, which measures rm performance, our econo-

metric models include several other characteristics of rms and their managers. Fi-nancial constraints facing the rms are approximated with leverage (LEVERAGE),which is the ratio of short-term and long-term debt to assets; the debt-to-equityratio is inappropriate because of the above-discussed problems with measurementof equity. Liquidity (LIQUIDITY) is measured as the ratio of working capital toshort-term debt. As we expect to nd a negative relation between CEO turnoverand lagged performance of rms, we use lagged values of ROA, ROS, and labor

productivity, as well as nancial constraints, in the regressions.Firm size is proxied by either the natural logarithm of assets (ASSETS) or

the natural logarithm of employment (LABOR). The variable EXPERIENCE ismeasured as the number of years of work record on managerial positions. The vari-able AGE measures a CEO’s age, and the variable BOARD captures the numberof directors in the supervisory board. The regressions also include the variableFEMALE, which is a dummy for the CEO’s gender.

Table 3 reports our baseline regression results. Columns 1, 2, and 3 show theestimation results for specications with rm size, measured by the natural loga-

rithm of assets, and columns 4 and 5 by the natural logarithm of employment. Theindicators of rm performance are ROA in columns 1 and 4, ROS in columns 2and 5, and LP in Column 3.

The estimates obtained are in line with our predictions. Managerial turnoveris negatively and statistically signicantly related to rm performance measuredby ROS, and especially ROA. An increase in ROA by three standard deviationsreduces the likelihood of CEO turnover by about 6 percent (see columns 1 and 4).The negative correlation between ROS and managerial turnover is observed onlyin the specication with rm size measured by the number of employees. A change

in ROS has a much smaller effect on CEO turnover than does a similar change inROA. A possible explanation is that return on sales does not reect the efciencyof management in generating earnings using available assets. In contrast to theseperformance indicators, LP appears to have no statistically and economically sig-nicant effects on CEO turnover. Being an industry-specic characteristic, LP mayfail to measure rm performance for all industries in general. Overall, however, theresults are similar to the ndings of Muravyev (2003a) and Kapeliushnikov andDemina (2005) for Russia, suggesting a certain degree of effectiveness of corporategovernance in Ukrainian companies. In contrast to earlier studies for Russia, our

results show that nancial indicators are an important trigger of CEO turnover.Table 3 also shows a number of interesting results related to the role of rms’




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The regression results do not show any statistically or economically signicanteffect of supervisory board size on the probability of CEO turnover. This is unex-

pected, given that studies from other countries suggest an important role for boardsize and composition in the monitoring and replacing of CEOs (see the surveyarticle by Hermalin and Weisbach 2003). We, however, nd that larger companies,ceteris paribus, are more likely to experience a change in CEO, regardless of howwe measure rm size.

The gender and experience of managers appear to have no effect on CEO turnoverin Ukrainian rms. However, managerial ownership has a negative and statisticallysignicant effect on the probability of turnover. An increase in the equity stake ofthe manager by 1 percent reduces the probability of dismissal by 0.3 percent. Our

study therefore conrms the adverse effect of managerial entrenchment, long sug-gested in the corporate governance literature.

We test whether the strength of the performance–turnover relation varies withsupervisory board size and CEO share of ownership. With this purpose, we intro-duce interaction terms between these characteristics and rm performance. Thecoefcients of these interactions, however, turn out to be statistically insignicant.The coefcients on the other variables remain fairly similar to those reported inthe baseline regressions. 9

We also investigate the link between CEO turnover and the performance of

companies relative to other rms in the same industry. The idea is that such a rela-tive measure better indicates the quality of management than rm performance perse. Company performance is subject to various shocks that may have nothing to dowith managerial decisions. The poor performance of a particular company may be aconsequence of a decline in the entire industry, rather than a result of mismanage-ment. Thus, shareholders and supervisory boards may more strongly emphasizesuch a relative evaluation when deciding the future of corporate executives. 10

We measure relative performance as the difference between the company’sperformance indicator and the average performance in the relevant industry, dis-

tinguished by two-digit industry codes. Table 4 shows the regression results for thestandard logit specications. In general, they are similar to the previous estimates.The main result is that the poor performance of a company in terms of relativeROA triggers CEO change, whereas other measures of relative performance do notappear to be strong signals for the dismissal of managers.

Another interesting issue is whether rm performance has different effects onCEO turnover in different industries. We check this by interacting rm performancewith industry dummies. 11 The negative effect of ROA on managerial turnover isobserved in the construction materials and industries. ROS has a strong effect

on managerial dismissal in the food processing, textile, construction materials,energy, and construction sectors. Strong effects of labor productivity are visible




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i s 3 , 0 1 2 . T

h e d e p e n d e n t v a r i a b l e e q u a l s o n e

i f t h e r e i s C E O t u r n o v e r i n a g i v e n y e a r a n d z e r o o t h e r w

i s e .

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l y . A l l r m - l e v e l v a r i a b l e s a r e

l a g g e d . S e e T a b l e 1 f o r v a r i a b

l e d e n i t i o n s .




number of rms comprising this industry as well as by its considerable homogeneity,implying that a rm’s performance provides a better signal for shareholders and

supervisory boards regarding the quality of management than is the case in moreconcentrated and less homogenous sectors.

Conclusions

This paper studies the relation between managerial turnover and rm performancein Ukraine. We use a new sample of open joint stock companies that operated inthe country from 2002 to 2006, a period of robust economic growth and intensiverestructuring. Our analysis is based on several specications of the standard logit

model. To mitigate distortions in measures of rm performance, which stem fromdecient accounting practices, we use multiple indicators of performance: ROA,ROS, and LP. In addition, we measure a rm’s performance relative to other rmsin the same industry, which may better indicate managerial effort in the rm.

Our main result is the presence of a negative relation between the likelihood ofCEO dismissal and rm performance, especially if the latter is measured by ROA,which most fully captures managers’ efciency in handling a rm’s assets. Thissuggests that corporate governance in Ukraine shows a certain degree of efciency.We also nd that larger ownership by managers reduces the likelihood of manage-

rial turnover. The size of supervisory boards appears to be insignicant in CEOturnover. In addition, we nd that Ukrainian managers are nancially constrained intheir activities, with the probability of a CEO’s departure being related to the rm’sleverage. We do not observe any signicant effect of liquidity, however. Includinginteraction terms between performance measures on the one hand and supervisoryboard size and managerial ownership on the other hand does not provide any ad-ditional insight into the functioning of Ukraine’s managerial labor market.

Our results are of particular interest in view of the ongoing changes in Ukrainiancorporate law, in particular the recent enactment of the law on joint stock companies.

According to the regulations that existed before the new law, the right to dismissexecutives belonged exclusively to the shareholders’ meeting. Supervisory boards,though having some authority to initiate management changes, had rather limitedpower in deciding the future of CEOs. The new law changes the balance of powerin favor of supervisory boards. It also establishes a minimum size of supervisoryboards. The proponents of these changes argue that they would produce a moreefcient response to poor performance of managers. Whether such a redistribu-tion of power within the rm leads to better monitoring of managers and improvescorporate performance may be an interesting topic for future research.

Notes




economy with possible looting of rms and a shortage of managers, it is not entirely im-plausible that worsening corporate performance may push some CEOs to leave for a better

job at another rm. However, such a scenario, while possible, is not very likely, for at leasttwo reasons. First, to the extent that poor performance can be perceived (because of infor-mation asymmetry) as signalling managers’ low ability, their chances of nding new jobsbecome tiny. Second, voluntary departures put a manager’s investment in the rm at highrisk (managers typically acquire nonnegligible fractions of equity during the privatizationprocess). We therefore believe it is fairly safe to assume that a negative performance–turnoverrelation reects boards ring CEOs even in the transition environment. Nevertheless, theissue may deserve a separate investigation.

2. The greatest concern is prot if measured net of taxes because taxes are often viewedas endogenous rather than parametric (Schaffer 1998).

3. This is typical in an inationary environment when rms that do not regularly revalue

their xed assets incur considerable losses in the current period.4. Managerial ownership may be positively associated with performance, as managershave stronger incentives to exert effort when their ownership stake is larger (Jensen andMeckling 1976). This incentive effect of managerial ownership works in the opposite direc-tion to the entrenchment effect.

5. Industry afliation may affect the cost of replacing CEOs, as it is related to the easeof nding an outside successor. If a company belongs to an industry consisting of very het-erogeneous rms, nding an outside successor may be difcult, as many potential candidatesmay not possess adequate (rm-)specic human capital.

6. The Internet address is www.smida.gov.ua, effective as of May 2008.7. Comparing open and closed joint stock companies is an interesting research topic,

though it is outside the scope of this paper.8. The sample is dominated by privatized enterprises that, according to the commonclassication scheme, belong to the group of large and medium-sized rms. (The average rmin the sample has 320 employees.) As to industrial afliation, 16.90 percent of the sampledrms are power utilities, 14.17 percent represent metal works and machinery, 13.24 percentcome from the construction materials industry, 12.81 percent come from the food processingindustry, 11.04 percent are from the mining and quarrying sector, and 11.37 percent representthe construction sector. The sample contains rms located in all twenty-seven regions ofthe country, with largest fractions in the city of Kyiv (11.70 percent), Poltava region (10.57percent), Donetsk region (8.47 percent), Cherkassy region (7.97 percent), and Kyiv region(7.14 percent). The data also suggest that the annual turnover rate among Ukrainian manag-ers is about 10 percent, with rather small variation within the period under study (between9.8 percent in 2003–4 and 10.8 percent in 2004–5).

9. These results are not reported in the paper but are available on request from theauthors.

10. For a detailed discussion of relative performance evaluation, see, for example, Hol-mstrom (1982) and Parrino (1997).

11. These results are not shown but are available from the authors upon request.

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