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Management Retention Following Poor Performance: Board Failure or Management Entrenchment

Опубликовано на портале: 10-01-2003
Acting in shareholders best interests, the board of directors should remove top management when a firm performs poorly and yet, empirical evidence indicates that sometimes boards replace top management and sometimes they do not. When top management is not replaced following poor performance, does this represent a failure of boards of directors and the market or is management so entrenched that it is not cost effective to replace management? That is, if the benefits of eplacing management exceed the costs and yet the board does not replace top management then the board has failed in their fiduciary responsibility to act in shareholders best interests. On the other hand, if the costs of replacing management exceed the benefits, then boards are behaving in shareholders best interest by not replacing management. Management is so entrenched that it is not cost effective to remove them. In this study, we examine a group of firms that performs poorly but boards do not replace management. For these firms, proxies for the cost of replacing management are compared to proxies for the benefits of retaining management.
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