Management Turnover in Subsidiaries of Conglomerates Versus Standalone Firms

Acknowledgements: We appreciate the valuable research assistance of Tamara Rhynehardt and Lynn McNeil. More than 30 years ago, Armen Alchian (1969) posited that replacement of an inefficient division head would be " quicker " within a conglomerate firm than if the division were a standalone firm. He ended his discussion of the issue with " But what the truth is, I do not know. " Despite the considerable progress that has been made on organizational structure, both theoretically and empirically, we still have limited evidence on management turnover within conglomerates versus standalone firms. The only direct evidence is by Blackwell, Brickley and Wiesbach (1994) who find that the turnover rate of subsidiary Texas bank managers is greater than that of CEO's of standalone Texas banks, but that the sensitivity of turnover to performance does not differ between the two groups of managers. 1 The objective of this paper is to provide additional evidence on whether the disciplining of subsidiary managers differs from that of standalone managers. Fama (1980) highlights the role of both the internal and external managerial labor markets for the viability of large corporations with diffuse ownership. Consistent with Fama's argument that the managerial labor market motivates and disciplines managers, numerous studies have demonstrated that CEO compensation and CEO turnover are related to performance. 2 Most of these studies, however, have focused on the top manager of the enterprise. 3 In contrast, we compare turnover of top managers of subsidiaries within conglomerate firms to turnover of CEOs of comparable standalone, single-segment firms. We construct our sample so that for each subsidiary manager in the sample, we select a 1 There is related literature focused on the workings of internal labor markets, but it does not compare the internal market for top managers to the market for CEOs. show that CEO turnover is related to stock price performance. Mikkelson and Partch (1997) and others show that CEO turnover is related to operating performance. For examples of the sensitivity of CEO compensation to performance, see Jensen and Murphy (1990) and Lippert and Moore (1994). 3 An exception is Mian (2000) who finds that CFO turnover is sensitive to prior stock and accounting performance. Also, Aggarwal and Samwick (2001) examine pay-performance sensitivity of divisional managers and chief executive officers. 2 manager of a similar size entity operating in a similar product market (same SIC code), except that the entity is organized …