Resg 129 0029

The Determinants of CEO Turnover: Evidence from France
Ali Dardour, Rim Boussaada, Sina Yekini, Mohamed Makhlouf

Dans Recherches en Sciences de Gestion 2018/6 (N° 129) , pages 29 à 55
Éditions ISEOR
ISSN 2259-6372
DOI 10.3917/resg.129.0029
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revue Recherche en Sciences de Gestion-Management Sciences-Ciencias de
Gestión, n°129, p. 29 à 55
The Determinants of CEO Turnover: Evidence from

France
Ali Dardour
Associate Professor
Kedge Business School
University of Bordeaux, IRGO, EA4190
(France)
Rim Boussaada
Associate Professor
FSJEG-Jendouba-Tunisia
University of Tunis-GEF-2A lab
(Tunisie)

Sina Yekini
Associate Professor (Principal Lecturer)
Coventry Business School
Coventry University
(United Kingdom)
Mohamed Makhlouf
Professor
Kedge Business School
(France)
We investigate the effect of corporate performance, ownership

structure and other governance mechanisms on CEO turnover. Based
30 ALI DARDOUR, RIM BOUSSAADA,
SINA YEKINI, MOHAMED MAKHLOUF
on data from 153 French listed firms between 2003 and 2012, we use
logit estimation technique. Consistent with previous studies, we show
that the fall of financial performance increases drastically the CEO
turnover probability. In addition, we find differentiated direct and
moderating effects, depending on the type of large shareholder
involvement. However, the CEO pay cut does not influence the
likelihood of CEO turnover.
Keywords: Corporate performance - Governance mechanisms - CEO

pay cut - CEO turnover.
JEL classification: G34, G32, M12
Nous étudions l’effet de la performance, de la structure de

propriété et d’autres mécanismes de gouvernance sur le taux de
rotation des dirigeants. L’étude empirique menée sur un échantillon
de 153 entreprises françaises cotées pour la période 2003-2012
montre les résultats suivants. Conformément aux études précédentes,
nous montrons que la chute de la performance financière augmente
considérablement la probabilité de rotation des dirigeants. En outre,
nous trouvons des effets directs et modérateurs différenciés, en

fonction du type de participation importante des actionnaires.
Cependant, la baisse de la rémunération du dirigeant n’influence pas
la probabilité de son changement.
Mots-clés : Performance - Mécanismes de gouvernance - Baisse de

rémunération - Rotation des dirigeants.
Investigamos el efecto del desempeño corporativo, la

estructura de propiedad y de otros mecanismos de gobernanza en la
rotación del director. El estudio llevado a cabo sobre una muestra de
153 empresas cotizadas en bolsa en Francia entre 2003 y 2012,
muestra los resultados siguientes. De acuerdo con estudios anteriores,
mostramos que la caída del desempeño financiero aumenta
drásticamente la probabilidad de rotación del director. Además,
encontramos efectos directos y moderadores diferenciados según el
tipo de participación de los accionistas mayoritarios. Sin embargo, la
reducción salarial del director no influye en la probabilidad de su
rotación.
DETERMINANTS OF CEO TURNOVER: EVIDENCE FROM FRANCE 31
Palabras-clave: Desempeño corporativo - Mecanismos de gobierno -

Reducción salarial del director - Rotación del director.
1. – Introduction
CEO turnover and its likely effect on corporate performance

has received attention from academics, professionals, as well as the
popular press. CEO change after poor performance is one of the main
corporate governance instruments that may be used to turn corporate
performance fortune around and this has been investigated by some
studies (Weisbach, 1988; Jenter and Kanaan, 2015). These studies
report that the power dynamics, between the CEO, the board of
directors and the other executives of the firm, influence CEO turnover.
Managerial power theory and agency theory might explain

the phenomenon of CEO turnovers. Managerial power theory posits
that powerful CEOs tend to get entrenched in the position, even when
performance declines (Fredrickson et al., 1988; Finkelstein et al.,
2009). In such a case, powerful CEOs can blame and dismiss other
executives to protect their positions and avoid turnover (Boeker,

1992). In contrast, the agency theory through the optimal contract
perspective, predicts that boards of directors may challenge the CEO
and become a driving force in CEO turnover through its mechanisms
(Engel et al., 2003; Kato and Long, 2006; Wang and Davidson, 2009).
The literature on executive turnover is extensive.

Nevertheless, it focuses mostly on the Anglo-Saxon context (Elsaid
and Davidson, 2009; Gao et al., 2012; Wang, 2014). However, some
recent studies have considered firms in other industrialized countries
(Lau et al. 2009; Balsmeir et al. 2015; De Cesari et al. 2016). Few
studies (Allemand, 2009; Nguyen, 2011) have been conducted in the
French context, particularly regarding how firm performance affects
CEO turnover and the impact of corporate governance on this
relationship. While the governance of French firms has seen some
profound changes (Viénot Report, 1995, 1998, NRE Law 2001,
Bouton Report, 2002), the evolution of French corporate governance
towards the Anglo-Saxon system has met a stiff resistance.
Furthermore, the ownership structures of French corporations remain
concentrated and family-based (Claessens et al., 2002; Dardour et al.,
2015). This may have some effect on CEO turnover. Moreover, the
combination of plurality of office at boardroom level and the imposing
size of boards necessitate the proliferation of top-level
interconnections in French firms (Alcouffe and Alcouffe, 2000).
In the French context, several researchers (Pichard-Stamford,

2000; Alexandre and Paquerot, 2000) investigated the entrenchment
theory. They conclude that the French control mechanisms are
ineffective and they explain this result by the fact that there is
difference between the French corporate governance system and the
Anglo-Saxon governance system. Specifically, entrenchment of
French managers is caused in particular by the absence of shareholder
legal action against the directors, and the proliferation of top-level
interconnections in firms (Mard and Marsat, 2009, Chikh and Filbien,
2011). Several CEOs come from the ranks of the State or maintain
close relations with it (Yoo and Lee, 2009). The cross-connections
between the political sphere and private French firms are common
(Dardour and Boussaada, 2017). The above justifications provide
justification for this study.
This study contributes to the existing literature on CEO
compensation in several ways. First, it clarifies the relationships

between firm performance, corporate governance and top management
turnover in France. The study achieved this by carrying out a more
recent and extended period of analysis than the work of Allemand
(2009) and Nguyen (2011) to cover the specificity of the situation
created by the recent financial crisis. Allemand (2009) examined the
value creation related to CEO departures in the context of poor
performing corporations. She conducted an empirical study on a
sample of 160 firms listed on the Paris stock exchange that replaced
their CEOs between 1996 and 2004. Nguyen (2011) studied the
impact of ownership structure and board characteristics on the
sensitivity of CEO turnover to performance, in large French-listed
firms between 1994 and 2001. Our study aims to fill the gap in the
existing literature by investigating the impact of firm performance on
CEO turnover in 153 large French firms on a relatively long period,
from 2003 to 2012. Second, the study enriches the existing literature
by establishing fundamental connections between firm performance,
governance mechanism and CEO turnover. Third, our paper brings
along important theoretical contributions. In fact, we contribute to the
CEO turnover literature as well as CEO compensation literature. Not

only do we examine the impact of main shareholders types on CEO
turnover, we also enhance our understanding of the link between CEO
pay cut and the probability of CEO turnover. We show that only
accounting performance impacts negatively and significantly the
probability of CEO turnover. However, we find differentiated direct
and moderating effects, depending on the type of large shareholder
involvement.
First, when we test the direct link between the shareholders types and
CEO turnover, we find that the CEO change drops significantly for
firms controlled by family. Second, the interaction variables between
the performance measure and the nature of the main shareholder show
that only the institutional major shareholder can influence the
relationship between performance and CEO turnover. Besides, we
demonstrate that the decision to reduce CEO compensation does not
substitute the decision of CEO change. Moreover, the percentage of
outside directors, the CEO duality, and the CEO age, are significant in
explaining CEO turnover differences between French firms.
The remainder of the paper is structured as follows. The next

section reviews the literature on corporate performance, governance

mechanisms and CEO turnover and presents our hypotheses. Section 3
discusses our methodological framework, describes our data, specifies
our model and engages in variable construction. Section 4 presents our
empirical results detailing the extent to which our hypotheses are
sustained or otherwise. The section also interprets the results. Section
5 ends with conclusions, a set of recommendations and the limitations
of the research.
2. – Literature review and hypothesis development
2.1. Performance and CEO turnover
A firm’s performance arguably provides a signal of the

CEO’s ability to manage the firm (Hermalin and Weisbach, 2003). For
Lindrianasari and Hartono (2012), it is one of the essential reasons for
CEO turnover. Most of the previous studies show that poor
performance leads to a higher likelihood of CEO turnover, which
agrees with the agency theory assumptions. However, firm
performance-dismissal sensitivity would be greater in countries where
managerial discretion was high, where performance measures were

informative, and where there was a well-developed CEO labor market
(Crossland and Chen, 2013). Extant studies have investigated the
nexus between firm performance and CEO turnover (see Weisbach,
1988; Kaplan and Minton, 1994; Parrino, 1997; Huson et al. 2001;
Engel et al. 2003). Most of these studies investigated this phenomenon
prior to the 2008 financial crisis. They indicate that prior poor firm
performance is the most significant determinant of forced CEO
turnover. Besides, many studies show that both market and accounting
performance measures affect the probability of replacing CEO
(Lindrianasari and Hartono, 2012; Wang, 2014).
However, empirical studies confirm that accounting measures
are more significant than stock performance measures in the CEO
change decision (Engel et al. 2003, Dah et al., 2014). Overall, in many
contexts, the results confirm the negative relationship between CEO
turnover and corporate performance.
H.1: Corporate performance is negatively related to CEO turnover
2.2. Governance mechanisms and CEO turnover


2.2.1. Ownership structure
A firm’s ownership structure affects the board ability to
monitor and replace CEOs. Board’s objectives and governance will
differ across block owners and their different identities such as
families or institutions (Eldenburg et al., 2004). Major shareholders
are likely to monitor executive’s activities and encourage them to
maximise firm value. According to Shleifer and Vishny (1986), the
best way to ensure control over executives is to have majority
shareholders assume the monitoring costs as they have the power and
are incentivised to prevent executives from rent extraction. Denis et al.
(1997) argue that the presence of large shareholders in a firm’s
ownership structure may likely increase the probability of CEO
turnover because of documented effectiveness of their member on the
board of directors. Consistent with this argument, higher ownership by
blockholders can reduce management entrenchment and support a
more active board. This mitigates agency problems and aligns the
incentives of shareholders and managers. In a similar vein, Kang and
Shivdasani (1995) argue that the sensitivity of turnover to stock-price

performance is marginally stronger for firms with block ownership.
The incentives to monitor might also differ among different

identities of large shareholders (Chen and Al-Najjar, 2012). The
disciplinary turnover is more pronounced in family firms (Li and
Srinivasan, 2011). In the case of a family ownership, CEO turnover
can be affected through two means: the entrenchment and the
alignment effects. The first is related to conflicts between large
shareholders and minority shareholders. Indeed, when family
members wield significant influence in the firm there is the likelihood
for the family to pursue their own interests at the expense to other
shareholders. Furthermore, if family members serve as CEOs, they
may be reluctant to leave the CEO position even in case of poor
performance (Chen et al., 2013).
The second is related to the theory of optimal contract and

agency theory to the extent that the founder family members care
about firm value and then encourages more effective control of the
performance of CEO. Controlling family shareholders provide
monitoring for CEOs mitigating managerial agency problems that

arise from the separation of ownership and control (De Cesari et al.,
2016). Chen et al (2013) argue that this will lead to a higher likelihood
of removing poorly performing CEOs compared to firms where there
is no family control. The family involvement in management,
ownership, and control (board representation) affects agency tensions
between majority and minority shareholders (other family blocks or
non-family shareholders) and therefore affects CEO turnover as a
corporate governance mechanism.
Similarly, some institutional investors are more active in

monitoring the CEO. For example, the presence of the state in the
ownership of certain firms may lead to close monitoring by the
government. While the state can act as a controlling shareholder, its
objectives and monitoring intensity differ from other types of
controlling shareholders (Liang et al. 2015). State ownership may
hinder performance-oriented decisions by forcing the management to
take into account political or social considerations in making business
decisions (Yoo and Jung, 2015), which may be motivated by non-
financial considerations such as maintaining jobs, regenerating regions
or even controlling strategic industries (Clarke, 2003). Moreover,

institutional stock sales significantly increase the probability of forced
CEO turnover (Qian, 2011). Institutional activism is a significant
factor in forced CEO turnover (Helwege et al., 2012). In this study,
we raise the question of whether the main shareholder type in France
affects corporate governance mechanisms by making managers less
or more accountable for firm profitability. Consequently, we
hypothesize as follow:
H. 2a: Main shareholder type influences CEO turnover probability

H. 2b: Main shareholder type influences the CEO turnover-corporate
performance sensitivity
2.2.2. Board of director’s characteristics

An extensive body of literature suggests that more boards that
are independent are better monitors (Fama and Jensen, 1983;
Weisbach, 1988). When boards are unhappy with CEO performance,
outside directors align with other senior executives to fire the
incumbent CEO (Shen and Cannella, 2002).
In this light, the sensitivity of turnover to performance depends
on the fraction of outside directors on the board (Conyon, 1998).

Independent boards are more responsive to poor performance in
dismissing CEOs (Weisbach, 1988). Outside directors enhance the
monitoring intensity and are substitutes for weak ownership control in
the absence of large shareholders (Balsmeir et al. 2015). Conyon
(1998) reports that the greater negative relationship between past
shareholders returns and CEO turnovers, the higher the proportion of
non-executives in the board of UK firms. The French economy
provides an interesting setting to explore this concern for a variety of
motives. First, in the French context, the proportion of outside
directors in the boards is increasing since the introduction of the
recommendation of Viénot’s report (1995). Second, listed French
firms generally have high ownership concentration. Thus, the impact
of independent board on CEO turnover in highly concentrated
ownership context remains ambiguous. Based on the above
arguments, we hypothesize as follows:
H. 3: The higher the proportion of outside directors the higher the

likelihood of CEO turnover in response to a declining firm
performance
Concentrating management decision and control decision in

one individual reduces the board’s effectiveness in monitoring
managers (Fama and Jensen, 1983). When the same person combines
CEO and Chairman positions – called CEO duality - internal control
systems fail, as the board of directors cannot effectively perform its
key functions including those of evaluating, controlling and replacing
poorly performing CEOs (Jensen, 1993). Goyal and Park (2002)
concluded that CEO duality is also an important factor affecting the
role of board in monitoring and replacing CEOs. They found that CEO
turnover is significantly less sensitive to firm performance in firms
with combined titles than in firms with separate titles. More recently,
Nguyen (2011) concluded that French firms with one-tier boards show
negative and significant CEO turnover-performance sensitivity. Based
on the above arguments, we hypothesize as follows:
H. 4: CEO duality is negatively related to CEO turnover


2.2.3. CEO turnover and CEO pay cut
One internal solution to the agency problem is the
development of compensation packages linking CEO’s compensation
to performance. When performance declines, CEOs face the risk of
power contests by directors and other executives (Fredrickson et al.
1988; Shen and Cannella, 2002). CEO pay cuts can compel the CEO
to improve firm performance (Bryan and Mason, 2016). The fact that
forced turnover is scarce does not mean that boards are completely
passive. If boards use sharp pay cuts as an effective alternative to
CEO turnover, this could help explain the low frequency of turnover.
Working on the relationship between compensation and CEO
turnover, Hasenhuttl and Harrison (2002) concluded that CEO
compensation has limited effect on CEO turnover. However, their
study focused mainly on the retention effects of compensation and did
not differentiate between involuntary and voluntary turnover.
Furthermore, Bebchuk and Fried (2004) explained that a powerful
CEO may successfully resist change even when the board changes the
compensation structure. More recently, Gao et al. (2012), utilizing a
sample of US firms over the period 1994-2005, found that poor firm
performance predicts a pay cut. They also noted that the likelihood of
receiving a sharp pay cut following poor performance is higher in
firms with stronger governance mechanisms. They noted that a
substantial pay cut is used as an alternative mechanism to a CEO
forced turnover.
The reduction of the annual bonus, allocated annually by
board of directors, might reveal this phenomenon. This annual bonus
is a percentage of the base salary. Its amount depends on achieving the
target organization outcome. A pay cut could include a reduction of
that bonus. Furthermore, the value of stock grants is proportional to
the growth of the company share price. Thus, a poor market
performance predicts a decrease in total compensation. The slope of
the compensation contract and forced turnover may be complementary
(Chakraborty et al. 2009). Governance mechanisms may only affect
discretional compensation decisions prompting us to consider the
annual bonus variation and not the share value that depends only on
the market value. The CEO pay cut may be used as an alternative
mechanism to discipline underperforming CEO and to create
incentives to exert effort to avoid poor performance. We therefore,
formulate the following hypothesis:

H. 5: CEO pay cut negatively impact the CEO turnover
3. – Research methodology
3.1. Sample
The aims of this paper are twofold. First, to investigate the

effect of corporate performance on CEO turnover. Second, to evaluate
the mediating role of CG mechanisms and ownership structure on
CEO turnover. To achieve these aims, we construct a model that
incorporates proxies for the above to arrive at our equations. We
identified the CEO turnover sample from IODS Corporate
Governance over the period from 2003 to 2012. These data allowed us
to classify CEO departures in two categories: forced or voluntary. We
classified turnover as forced if the CEO was fired, forced out from the
position, or departed due to control change. Voluntary turnover is for
all other reasons, such as CEO retirement, death or CEO change of
position within the company. Finally, we labeled the firms that

experienced no turnover as “No turnover". Our final sample consists
of 1368 firm-year observations of “No turnover”, 129 instances of
voluntary turnover, and 33 cases of forced turnover. Notably, the
frequency of voluntary turnover is four times the forced turnover.
3.2 Model specification and estimation
Following prior CEO turnover studies (Parrino, 1997; Shen

and Lin, 2009), we use the following logit regression to test the
relationship between performance, governance, ownership and the
CEO-turnover decisions.
Logit (Pr (Turnover)/1-Pr (Turnover)) it = α it+ β1

Performanceit+ β2 Ownershipit + β3 Governanceit + β4 Control
variables + u it (2)
Where ‘Turnover’ is a binary variable that takes the value of

one (‘1’) if the CEO leaves his/her firm during the year, and zero (‘0’)
otherwise. ‘Performance’ is the firm’s accomplishment in the current
year. We use three alternative measures of firm performance. We use

a stock market measure, denoted as Total Shareholder Return (TSR),
to proxy economic performance. For accounting measures of
performance, we use Return on Assets (ROA). Finally, we use Market
to Book ratio (MTB) to measure growth opportunity. Concerning the
ownership, we use three types of the largest shareholder (Family,
institutional and widely held ownership). Regarding the corporate
governance, board characteristics are used. The board characteristics
include the CEO duality and the percentage of outside directors on the
board.
We also use a set of control variables, which include firm-
specific and CEO-specific characteristics that have been found to
influence CEO compensation in prior studies (Gregory-Smith, 2012;
Xie, 2014). We use the natural logarithm of total assets in Euros as a
firm-size proxy and CEO age as a proxy for the experience of CEOs.
We use a series of dummy variables to control for industry effect on
CEO Turnover. We adopt the Industry Classification Benchmark, to
distinguish the different industries. Besides, we include year dummies
to capture the year effect (Table 1).
In order to test the effect of CEO pay cut on CEO turnover

(H. 5), we use a second model as following:
Logit (Pr (Turnover)/1-Pr (Turnover)) it = α it+ β1

Performanceit+ β2 Ownershipit + β3 CEO pay cutit + β4
Governanceit + β5 Control variables + u it (2)
Table 1
Turnover, firm performance and governance variables and their
measurements
Variables Measurement
Turnover Is equal to 1 if the firm replaces its CEO

during the year and 0 otherwise
Firm performance
ROA Return On Assets: Operating profit divided by
total assets
TSR Total Shareholder Return: (Change in stock
price + dividends paid)/Beginning stock price.

MTB Market to book: Share price divided by Book
value per share at the end of fiscal year under
consideration
Firm governance
Shareholder type Major shareholder category is three binary
variables: family, institutional, (if the capital
controlled by one of these two categories is at
the 20% threshold of the voting rights) or
widely held capital.
CEO duality Is equal to 1 if the CEO is also the president of
the board and 0 otherwise
Outside directors The percentage of outside directors on the
board
CEO pay cut Is equal to 1 if the annual bonus decline, 0
otherwise
Control variables
CEO age CEO age
Firm size Is the logarithm of the total assets
Industry Dummy variables representing four industries:

industry, services, utilities and technologies
Years Dummy variables from 2003 to 2012 with
2003 being the excluded year
4. – Results and discussion
4.1. Descriptive statistics
Table 2 reports descriptive statistics for the sample firms.
Table 2
Descriptive statistics
Variable Mean Standard

deviation
ROA 3.99 8.19
MTB 2.30 4.53
TSR 15.61 54.22

Assets (million €) 48.19 20.85
Outside directors 46.14 21.37
CEO age 54.95 7.32
Yes (1) % No (0) %
CEO turnover 11.17 88.82
Family dominator 36.89 63.10
Institutional dominator 44.73 55.26
Widely held ownership 18.42 81.57
CEO duality 52.44 47.55
CEO pay cut 31.31 68.68
On average, as shown by positive financial performance and

market based performance measures, French firms are profitable. The
results show that the average ROA is approximately 4, MTB is 2.30
and TSR is 15.61. The data also reveal that there are, on average, 46%
of board members are outside directors. CEOs in French listed firms
are, on average, 55 years old. Regarding the ownership structure,

family owned companies represent 36.89% of the sample. However,
institutional shareholders reach 44.73 %. Furthermore, Table 2 shows
that, on average, about 31% of firms reduce their CEO annual bonus.
Table 3 reports CEO turnover statistics. The number of

classified forced turnover is quite small. Our descriptive statistics
show that our sample has only 162 turnovers (10.58%) from 2003 to
2012, which complies with the 10% we had observed in the literature
(see Engel et al. 2003; Eisfeldt and Kurhnen, 2013).
Moreover, in our study, forced turnover cases represent

2.15% of all observations. These observations represent 20.37% of all
the CEO departures. This conforms to the findings of most previous
studies, which have documented a relationship of 20% to 80%, on
average, between forced and voluntary turnover.
Table 3
Distribution of CEO turnover by year
Year (1) (2) (3) (4)
Non- Forced Voluntary Total

turnover turnover turnover
2003 143 1 9 153
2004 143 3 7 153
2005 128 4 21 153
2006 136 5 12 153
2007 135 5 13 153
2008 136 2 15 153
2009 135 3 15 153
2010 138 5 10 153
2011 135 1 17 153
2012 139 4 10 153
Total 1 368 33 129 1 530
Table 4 represents correlation between variables. We notice

that CEO turnover is negatively correlated only with the accounting
performance (-0.065). This finding is consistent with the argument
that poor accounting performance leads to increase in the likelihood of
CEO turnover. However, We observe no correlation between

Shareholder Return and CEO turnover. Moreover, the correlation
between CEO turnover and large shareholder types is negative only
when the firm is controlled by family members (-0.061). This finding
is consistent with Kachaner et al. (2012), showing that on average,
family firms have a relatively lower turnover of workforce than non-
family firms, and thus creating a culture of commitment.
Table 4
Correlation matrix
We notice that CEO pay cut has a positive and significant

relationship with CEO turnover (0.081), suggesting that CEO turnover
and CEO pay cut are complementary rather than substitute
disciplinary mechanisms. It should be noted that correlation analysis is

rather simplistic and additional control are therefore needed for clearer
conclusions. Correlations between explanatory variables are low
suggesting that multicollinearity is not likely in the regressions that
will follow. Multicollinearity makes parameter estimates less stable
while also inflating their standard errors. Chatterjee and Price (1991)
suggest that variance inflation factors (VIFs) with values more than 10
are indicative of this econometric issue. We have calculated the VIF
for our variables and the highest is equal to 2.06 giving us confidence
that the problem is immaterial (see Table 4).
4.2. Multivariate analysis
Table 5 presents the logit regression results for the panel

regression of corporate performance, corporate governance, ownership
structure and control variables on CEO turnover. Model 1 shows that
accounting performance affects negatively and significantly on the
likelihood of CEO turnover, confirming our H. 1. This suggests that

poor financial performance increases the probability of CEO turnover.
On the other hand, market based performance has no impact on CEO
turnover. These results align with the findings of previous studies such
as Weisbach (1988) and Farrell and Whidbee (2003). The significant
link between firm financial performance and CEO turnover could be
interpreted as an indicator of generally strong monitoring intensity in
French listed firms. Indeed, CEO turnover is considered as a measure
of board of directors’ effectiveness (Huson et al., 2001).
Table 5
Logistic regression for CEO turnover and corporate performance
& governance
CEO turnover
Model 1 Model 2 Model 3 Model 4
Coeff. Coeff. Coeff. Coeff.
(t) (t) (t) (t)
Intercept 1.696 1.520 1.805 2.289
(1.57) (1.39) (1.00) (1.58)
ROA -0.023 0.020 -0.034 -0.033
(-1.85)** (0.87) (-1.62)* (-0.55)
TSR -0.001 -0.001 -0.000 -0.000

(-0.59) (-0.57) (-0.11) (-0.12)
Market-To-Book 0.004 0.002 0.023 0.023
(0.26) (0.11) (0.91) (0.92)
Firm size -0.000 -0.000 0.000 0.000
(-0.20) (-0.28) (0.12) (0.11)
CEO duality -1.192 -1.182 -1.084 -1.081
(-5.35)*** (-5.28)*** (-3.89)*** (-3.87)***
Outside directors -0.009 -0.010 -0.016 -0.016
(-2.04)** (-2.11)** (-2.65)** (-2.62)***
CEO age -0.047 -0.049 -0.061 -0.061
(-3.25)*** (-3.36)*** (-3.11)*** (-3.10)***
Family major -0.663 -0.421 -0.368 -0.388
shareholder (-2.28)** (-1.15) (-0.97) (-0.074)
Institutional major -0.005 0.201 0.180 0.196
shareholder (-0.21) (0.64) (0.52) (0.42)
ROA*Family major - -0.047 - 0.003
shareholder (-1.17) (0.05)
ROA*Institutional - -0.059 - -0.003
major shareholder (-2.09)** (-0.06)
CEO pay cut - - 0.380 0.379
(1.47) (1.47)
Year and Industries Yes Yes Yes Yes
dummies
Observations 1 127 1 127 724 716
Wald chi2 61.97 64.13 44.27 44.27
Prob chi2 0.00 0.00 0.00 0.00

Sample period 2003-2013. Variables definitions are in the table 1. ***, **, * indicate
statistical significance at 1%, 5% and 10% significance level, respectively
Our results partially contradict the empirical study of Nguyen

(2011) who found that forced CEO turnovers is negatively and
significantly related to both accounting and stock performance in
French firms. We conclude that French firms are less likely to fire
CEOs for only poor stock performance.
Considering the ownership structure (family ownership,
institutional ownership or widely held ownership), the probability of
CEO turnover drops significantly when the major shareholder is a
family or a founder. The results indicate that the institutional
ownership is not linked to the probability of CEO turnover (H. 2a
validated only when the major shareholders are family members). This
result could be justified by the family ownership literature. Nguyen
(2011) shows that, in family businesses, the change of CEO is very
scarce, particularly when the CEO is the founder of the firm or a
member of the founding family. He demonstrated that institutional
investors type do not affect the performance-CEO turnover sensitivity.
Furthermore, he argued that the coexistence of blockholders and

institutional investors type do not influence the performance-CEO
turnover sensitivity.
We extend the logit regression reported in Model 1 with
interactions between accounting performance and ownership variables
described above. The results of the Model 2 reflect the moderating
effect of main shareholder type on the CEO turnover/performance
sensitivity. The coefficient on the interaction variables between the
performance measure and the nature of the main shareholder captures
the incremental sensitivity for main shareholder of the firm. We find
differentiated direct and moderating effects, depending on the type of
large shareholder involvement.
The results show that the only interaction variable between

financial performance and institutional investor (ROA*Institutional
major shareholder) in our model 2 is negative and statically
significant. This shows that institutional investors strengthen the
relationship between performance and the likelihood of CEO turnover
(H. 2b). Indeed, in firms where the main shareholder is an institutional
investor, 1% growth in financial performance leads to 5.9% drop in
the probability of changing the CEO (Baseline variable: firms with

widely held ownership). This indicates that the relationship between
turnover and performance is significantly stronger for firms with
institutional major shareholder. In summary, institutional investors are
active in corporate governance and are more conscientious than the
other shareholders types (Pearce and Zahra, 1992).
Furthermore, with regards to CEO compensation changes, the
coefficient of CEO pay cut is statically insignificant (H. 5
invalidated). Our findings corroborate the result of Nguyen (2011)
who reports that the decline in short-term incentive compensation
does not influence the likelihood of CEO turnover.
However, the higher institutional ownership strengthens the
sensitivities of pay cuts and CEO turnover for poor firm performance
as suggested by Gao et al. (2012). Based on US data, they concluded
that boards substitute pay cuts for forced turnover as a response to
poor performance. We conclude that the board of directors does not
use the pay cut mechanism as a substitute for the decision of changing
the CEO in French firms.
Moreover, the coefficient of outside directors is negative and

significant in all specifications (H. 3 validated). We conclude that
their ability to remove poorly performing CEO is upheld, which
confirms the finding of Kaplan and Minton (1994), and Kang and
Shivdasani (1995) for a sample of Japanese firms. Our results display
a clear evidence of a relation between the presence of outside directors
and board efficiency.
Increased independence on French firm’s boards leads to
greater effectiveness in monitoring poorly performing CEOs. This
study shows that outside directors are beneficial to shareholders by
enhancing the monitoring capability of the board and increasing its
bargaining power over the CEO in contract negotiation and
replacement. In addition, CEO-chairman duality is negatively
correlated with turnover probability in all specifications (H. 4
validated). CEOs combining positions of Executive Officer and
Chairman of the Board is rarely dismissed. We explain this result by
the fact that excessive power vested in a CEO-Chairman of the board
increases their entrenchment. CEO duality increases managerial power
that can weaken the monitoring effect of board.
Regarding the CEO age, the results show that the coefficient
is negative and statistically significant. This illustrates that younger

French CEOs are more likely to be disciplined by the threat of
turnover. This result confirms the findings of Jensen and Murphy
(1990) and Chevalier and Ellison (1999) who conclude that the
probability of being fired is less sensitive to performance for older
CEO. This could be due to their experience and reputation in their
industry, which often enhances performance.
Finally, we find that firm size, measured as natural logarithm
of total assets, has no significant impact on the CEO turnover
likelihood. This result suggests that turnover is often the outcome of a
joint decision made by both the firm and the CEO, which can be
valuable for small and larger firms.
4.3. Robustness checks
To address the potential problem of the reverse causality

between the performance and the CEO turnover, we calculated the
difference between the ROA of the firm and the median ROA of the
industry for all firms belonging to five industrial categories (called
industry adjusted ROA).
We perform new models (Models 5, 6, 7, 8) in which we use

the lag of the industry-adjusted ROA by one year. Table 6 shows that
the interpretation of the coefficients of our models remains
unchanged. The likelihood that a CEO will be removed is higher after
a period of poor performance. The insignificant relationship between
CEO pay cut and CEO turnover confirm the non-existence of the use
of compensation mechanisms as a substitute to the CEO change
decision.
We included an interaction variable between financial

performance (measured by the industry-adjusted ROA) and
shareholder structure. The results show that this variable is not
significant for family large shareholders but significant for firms
controlled by institutional investors. Consequently, the sensitivity of
CEO turnover versus performance is independent of control exerted
by the family as a shareholder. Executives of family controlled firms
remain in service despite poor performance. However, the increase in
the adjusted ROA leads to decline the likelihood of CEO change in
firms controlled by institutional. Institutional investors are effective in
monitoring the board’s decisions.

Finally, as a robustness check, reverse causality was
investigated to see whether CEO turnover affects future firm
performance which is measured by industry-adjusted ROAt+1. The
results (untabulated but can be provided on request) show that the
CEO change does not improve the firm performance. Our result is
consistent with the literature, which established that firm performance
is a predictor of CEO turnover, rather than the reverse relationship;
thus, we believe the possibility of reverse causality to be minimal.
Table 6
Logistic regression for CEO turnover and corporate performance
& governance
CEO turnover
Model 5 Model 6 Model 7 Model 8
Coeff. Coeff. Coeff. Coeff.
(t) (t) (t) (t)
Intercept 1.424 1.446 2.407 2.410
(1.45) (1.47) (1.64) (1.64)
Lagged industry- -0.021 -0.002 -0.019 -0.006
adjusted ROA (-1.76)* (-0.17) (-1.11) (-0.28)
TSR -0.002 -0.001 -0.000 -0.000

(-0.85) (-0.50) (-0.26) (-0.15)
MTB -0.002 0.001 0.013 0.019
(-0.10) (0.06) (0.44) (0.67)
Firm size 0.043 0.045 0.038 0.033
(0.76) (0.80) (0.54) (0.47)
CEO duality -1.146 -1.175 -1.026 -1.053
(-5.02)*** (-5.06)*** (-3.76)*** (-3.79)***
Outside directors -0.010 -0.010 -0.017 -0.017
(-2.17)** (-2.15)** (-2.76)** (-2.65)**
CEO age -0.054 -0.055 -0.065 -0.066
(-3.55)*** (-3.58)*** (-3.28)*** (-3.26)***
Family major -0.771 -0.733 -0.635 -0.593
shareholder (-2.86)** (-2.70)*** (-1.98)** (-1.81)**
Institutional major -0.118 -0.143 -0.187 -0.168
shareholder (-0.47) (-0.55) (-0.63) (-0.56)
ROA*Family major - -0.032 - -0.028
shareholder -(0.90) (-0.79)
ROA*Institutional - -0.038 - -0.020
major shareholder (-1.79)** (-0.46)
CEO pay cut - - 0.375 0.388
(1.46) (0.132)
Year and Industries Yes Yes Yes Yes
dummies
Observations 1035 1027 711 708
Wald Chi2 61.28 62.97 43.69 44.10
Prob Chi2 0.0000 0.0000 0.0000 0.0000

Sample period 2003-2012. Variables definitions are in the table 1. ***, **, * indicate
statistical significance at 1%, 5% and 10% significance level, respectively.
5. – Conclusion
Using a sample of French listed firms in the SBF 120

experiencing CEO turnover between 2003 and 2012, we investigated
the association between corporate performance (accounting
performance and market-based performance), the governance
mechanisms, ownership structure and the decision to change the CEO.
The estimation results show that accounting performance measure has
more weight than the stock market performance in the CEO change
decision. Poor accounting performance leads to a higher likelihood of
CEO turnover. The board of directors choose an accounting measure
that could be manipulated by the CEO rather than a market measure.
This selection method of performance measures can be explained by
the desire of the directors to legitimize their decision about the
financial health of the company more than the change in its share
price. Furthermore, changing a CEO may depend on the main
shareholder of the company, holding at least 20% of the voting rights.
Indeed, our results show a negative direct effect on the probability of
changing the CEO when a family controls the firm. This can be
justified by the theory of entrenchment. A CEO from the family has
the power to extend his mandate despite the fall in the company's
performance. It could also suggest that the family as a controlling
shareholder is indifferent to firm performance as long as the CEO is a
member of the founding family interested in their private interests,
which may be above those of other shareholders. Sraer and Thesmar
(2007) alluded to this finding in their study. Nevertheless, concerning
moderating effects, interaction variables corporate performance*
Shareholder-type show that only institutional investors type is
sensitive to the improved financial performance of the company and
thus reduce the probability to dismiss the CEO.
Our research proves that, contrary to previous studies, the
decision to lower the CEO pay does not substitute the decision of its
change. The coefficient of the pay cut variable is associated positively
but insignificantly with the CEO change likelihood.
French CEO is considered a passive agent who takes for

granted the compensation contract and thus the pay cut does not
motivate their performance.
Regarding other governance variables, our estimations
observe a negative and significant relationship between CEO duality,
CEO age, outside directors and CEO turnover. This attests to the
usefulness, veracity and effectiveness of CG mechanisms instituted by
various attempts at strengthening organizational governance of French
listed companies.
Our study has certain limitations that are essentially linked to
the omission of certain variables that may account for the CEO
turnover such as other CEO characteristics e.g., their recruitment
origin (from within or outside of the company), education, and
previous experience. In addition, it would be worthwhile to
incorporate the reasons for the CEO forced turnover. We recognize
that factors other than performance could play a role in explaining
CEO turnover. For example, availability of alternative CEOs in the
labour market or the cognitive conflicts with other board members and
team management could explain the CEO change decision.
Finally, our study calls for further research on the

effectiveness of some governance mechanisms. Further investigations
are needed to better understand the reasons for CEO turnover in
French firms and the interaction between CEO turnover, corporate
performance and governance mechanisms.
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The Determinants of CEO Turnover: Evidence from France

Ali Dardour, Rim Boussaada, Sina Yekini, Mohamed Makhlouf

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The Determinants of CEO Turnover: Evidence from

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We investigate the effect of corporate performance, ownership

Keywords: Corporate performance - Governance mechanisms - CEO

JEL classification: G34, G32, M12

Nous étudions l’effet de la performance, de la structure de

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Mots-clés : Performance - Mécanismes de gouvernance - Baisse de

Investigamos el efecto del desempeño corporativo, la

Palabras-clave: Desempeño corporativo - Mecanismos de gobierno -

CEO turnover and its likely effect on corporate performance

Managerial power theory and agency theory might explain

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The literature on executive turnover is extensive.

In the French context, several researchers (Pichard-Stamford,

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CEO turnover literature as well as CEO compensation literature. Not

The remainder of the paper is structured as follows. The next

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2. – Literature review and hypothesis development

2.1. Performance and CEO turnover

A firm’s performance arguably provides a signal of the

managerial discretion was high, where performance measures were

H.1: Corporate performance is negatively related to CEO turnover

2.2. Governance mechanisms and CEO turnover

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Shivdasani (1995) argue that the sensitivity of turnover to stock-price

The incentives to monitor might also differ among different

The second is related to the theory of optimal contract and

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Similarly, some institutional investors are more active in

or even controlling strategic industries (Clarke, 2003). Moreover,

H. 2a: Main shareholder type influences CEO turnover probability

2.2.2. Board of director’s characteristics

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H. 3: The higher the proportion of outside directors the higher the

Concentrating management decision and control decision in

H. 4: CEO duality is negatively related to CEO turnover

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The aims of this paper are twofold. First, to investigate the

position within the company. Finally, we labeled the firms that

3.2 Model specification and estimation

Following prior CEO turnover studies (Parrino, 1997; Shen

Logit (Pr (Turnover)/1-Pr (Turnover)) it = α it+ β1

Where ‘Turnover’ is a binary variable that takes the value of

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In order to test the effect of CEO pay cut on CEO turnover

Logit (Pr (Turnover)/1-Pr (Turnover)) it = α it+ β1

Turnover Is equal to 1 if the firm replaces its CEO

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Industry Dummy variables representing four industries:

4. – Results and discussion

4.1. Descriptive statistics

Table 2 reports descriptive statistics for the sample firms.

Variable Mean Standard

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