Pieter van Oijen. Department of Finance University of Amsterdam Roetersstraat WB Amsterdam The Netherlands

Transcription

1 The Importance of Ownership Structure, One-Share-One- Vote and Bank Control for Corporate Governance: Evidence from Management Turnover in The Netherlands Pieter van Oijen Department of Finance University of Amsterdam Roetersstraat WB Amsterdam The Netherlands Abstract Are differences in corporate governance systems important for firm behavior? This paper looks at the role of ownership structure, voting rights and bank control for corporate governance in The Netherlands. The corporate governance system in The Netherlands seems to be positioned somewhere in between the Anglo-Saxon, German and Japanese systems. As a unique feature, the Dutch corporate governance system is characterized by a high degree of cross sectional variation in the violation of the one-share-one-vote principle. We link the ownership structure and voting structure of the firm and its relation with banks to the managerial turnover of the firm. The corporate performance-management turnover relation is strikingly similar to that of the US, the UK and Germany. Ownership structure doesn t seem to affect management turnover or the management turnover-corporate performance relation. We find some evidence that for firms that violate the one-share-one-vote principle, poor performance increases management turnover. This suggests that control mechanisms in these firms rely more heavily on corporate performance as a signal for managerial quality. The ownership structure of these companies also seems to be different. Finally, there is some evidence that the presence of bankers on the supervisory board of a firm increases CEO turnover if the cash flow coverage of debt is poor. First Draft: November 1998

2 1. INTRODUCTION Investors can rely on several mechanisms to control management. These include compensation schemes, takeovers, internal control by the board of directors, shareholder monitoring and control through debt contracts. 1 Differences across countries in the degree to which investors rely on each of these mechanisms translate into distinctive corporate governance systems. Because the incentives and actions of those in control are ultimately governed through the precise way these mechanisms are effectuated, they may lead to disparities in the behavior of firm, and consequently to differences in the performance of companies. This observation has recently led to an increase in research aimed at obtaining more precise knowledge about the differences in governance structures across countries and their consequences. Much attention has been given to distinctions between systems in the ownership structure of firms and the position of banks/financial institutions as lenders and shareholders. This paper contributes to this research by analyzing how these institutional characteristics affect management turnover within the Dutch system of corporate governance. The corporate governance system in The Netherlands seems to be positioned somewhere in between the Anglo-Saxon, German and Japanese systems. Ownership is moderately concentrated. Corporate shareholdings are important, as are insider holdings. The supervisory board is strictly separated from the management board but its composition is formally an internal matter for the supervisory board itself, not for shareholders or workers. Banks are mostly financial conglomerates that are active as commercial banks, investment banks and insurance companies. They are important shareholders but their voting power is limited compared to Germany. As a unique feature, the Dutch corporate governance system is characterized by a high degree of cross sectional variation in the violation of the one-share-one-vote principle: some firms control 100% of the voting rights while others control 0%. 1 Besides these mechanisms, some other important channels of corporate governance include product market competition, labour market competition and fiduciary duties (enforced through laws) (Shleifer and Vishny 1997). The use of these channels however is generally outside the discretion of financiers. 2

3 Our main focus is on the relation between management board turnover and corporate performance and how this relation is affected by ownership structure, voting structure and bank control. This allows us to add to the existing literature in four different ways. First, we analyze the relative sensitivity of board turnover to different measures of corporate performance. The general perception (see Kaplan 1994a,b)is that compared to the US and UK, corporate governance mechanisms in Continental Europe and Japan favor policies for maximization of firm value through long term growth. The Anglo- Saxon system is often accused of too large an emphasis on short term earnings and stock price performance. However, the results in Kaplan (1994a,b) fail to support this contention. He finds that the corporate performance-management relation is largely the same in these countries. If our results for the Netherlands turn out to be similar, this would further blur the differences in accountability and managerial incentives between various governance systems. Second, we relate ownership structure to turnover rates. Concentration of ownership improves the incentives of shareholders because under costly monitoring, the return on the monitoring investment is increasing in the stake of the owner (Shleifer and Vishny 1986, Huddart 1993, Admati, Pfleiderer and Zechner 1994). This incentive effect is often considered as one of the advantages of the Continental European and Japanese corporate governance systems. The evidence for the effects of ownership structure on the performance-management turnover relationship in the different governance systems is mixed. For Germany and the UK, Kaplan (1994b), Franks and Mayer (1997) and Franks, Mayer and Renneboog (1998) find no evidence of ownership structure affecting this relationship. Kang and Shivdasani (1997) and Denis, Denis and Sarin (1997) however, report results that suggest that blockholders are a factor in strengthening the management turnover-performance relation in Japan and the US. Analyzing the Dutch evidence with respect to these relations is especially interesting because we are able to get a precise measure of stakes held by different types of large shareholders. This allows us to assess the importance of the identity (i.e. type) of the large shareholder. Does managerial ownership entrench managers? Is there any 3

4 evidence that supervisory board ownership improves their monitoring incentives? Which of the different types of large shareholders seem to monitor? Third, we consider the importance of one-share-one-vote. Almost 50% of the firms in our sample split at least some of the voting rights and cash flow rights to retain control over the voting rights. Does this separation entrench management by reducing their accountability? Fourth, we assess whether ties with banks/financial conglomerates affect managerial turnover. Banks are important stakeholders in The Netherlands. They frequently hold large equity stakes in firms, bankers often become a member of the supervisory board and bank debt is an important source for financing (given the absence of a large corporate bond market in The Netherlands). We measure ties with by the presence of a banker on the supervisory board and through the amount of short-term bank debt in the capital structure of the firm. We check whether management turnover if affected by our measures for the control potential of banks when cash flow performance is poor relative to the amount of debt outstanding. Our results indicate that the direct relation between corporate performance and management board turnover is largely similar to that of other countries. We find little support for a lack of response to poor short-term stock price performance or poor short-term earnings performance. Ownership structure doesn t seem to affect the level management turnover or the management turnover-corporate performance relation. We find some evidence that for firms that violate the one-share-one-vote principle, poor performance increases management turnover. This suggests that control mechanisms in these firms rely more heavily on corporate performance as a signal for managerial quality. The ownership structure of these companies also tends to be different. Finally, there is some evidence that the presence of bankers on the supervisory board of a firm increase CEO turnover if the cash flow coverage of debt is poor. We fail to find such a relation when using short-term bank loans as a proxy for the potential of bank control. 4

5 Overall conclusion on adaptability. 2. Sample, Data Sources. All listed firms in 1992, followed through Management Board Turnover and Corporate Performance Almost all companies in our sample are characterized by a two tier board structure, with supervisory tasks and executive tasks strictly separated from each other. We refer to the chairman of the management board as the CEO. Data on the size and turnover of the management is obtained from the annual reports. We also used these reports to investigate the reasons for a departure of a board member. To correct for natural turnover, we search the reports of the supervisory boards for the reasons for a departure of a manager. We consider three types of natural turnover: death or illness, retirement, and age induced departure. The latter involves members of the management reaching an age (or tenure) for which the corporate charter dictates their departure from the board. Whenever the annual report stated that a board member leaves the board because of retirement, we classified this departure as such. Ideally one would like to account for age in this case. Early retirement seems an attractive solution for poorly functioning board members, and it is possible that the tenure of such board members is stretched until they reach the age in which early retirement is possible (often 60 or 62). However, we were unable to obtain complete data on the age of retiring board members. Table 1 reports the annual average size and turnover of the management board. Board turnover other than natural turnover is labeled non standard turnover. The average board size equals 5.29 for the supervisory board and 2.6 for the management board. The sum of these averages is relatively small compared to the average board size in the 5

6 US, Germany and Japan which ranges from 15 to 25 for the largest companies in those countries (Kaplan 1994a,b). The non-standard management board turnover ratios are strikingly similar to those found for the UK by Franks et al (1998). Kaplan (1994b) finds that total management board turnover in Germany equals almost 10% per year, just a little less than our total management board turnover of 11.5%. The CEO turnover ratio however is relatively low compared to most other countries. Warner, Watts and Wruck (1988) find an annual total turnover rate of at about 18% for the US although Kaplan (1994a) (using a smaller sample) finds a total turnover rate of 12% (excluding cases of death and illness). Franks et al (1998) report a non-standard CEO turnover rate of 13.6% for the UK. This figure is still much higher than our total turnover rate for CEOs in The Netherlands. Kaplan (1994a) reports a 15% CEO turnover rate for Japan, excluding departures due to death and illness. For Germany, Kaplan (1994b) finds a total turnover ratio of 11% for CEOs. The direct relation between corporate performance and board turnover is interesting for several reasons. First, it is informative about the overall degree in which the Dutch system of corporate governance induces accountability. One expects that if those in control of the company are not the right persons for their positions, they will have to give up their jobs. In turn, poor firm performance is more likely if a firm is run by incapable people. Hence, if those in control are held accountable, there should be a link between corporate performance and board turnover. The direct relation between corporate performance and board turnover therefore in itself serves as a basic test for the presence of accountability in the system. We have to add to this however, that it is nothing more than a basic test for the functioning of the governance system. Accountability can be enforced by many different parties (from inside the firm, by banks, by shareholders) and absence of it would point at a serious malfunctioning. However, its presence doesn t allow strong inferences on the overall quality of the system in place and the incentives and firm behavior that result from it. Second, by including different performance variables we can establish to which performance measures the boards are held accountable. The general notion is that the 6

7 Continental European and the Japanese governance systems, with there virtual absence of a hostile takeover market, are less focused on short term stock price performance. In stead, these are often assumed to be focused more on long term growth of the company or, given the dominant position of bank relationships, on safeguarding the interests of banks. If so, we expect to find the relation between corporate performance and board turnover in those systems to be of a different nature that the relation in for Anglo-Saxon systems, especially with respect to stock price performance. For The Netherlands, the overall sensitivity of board turnover with respect to stock price performance is especially interesting because of the limited control that shareholder formally have over the composition of both boards. To address these issues, we use four different performance measures which are also used in similar studies for other countries. The first variable is market adjusted stock returns. This variable directly relates the position of board members to shareholder value, and is therefore indicative for the extent to which the board is held accountable for stock price under performance. The other variables are less directly related to shareholder value. The second variable we use is changes in pre tax earnings over assets, which we use as a measure of earnings growth. The other performance variables are a dummy variable for losses and the firm s growth in sales. We regard the change in earnings over assets and growth in sales measures as less directly related to short term stock price performance, and more representative for firm growth. We do not claim that the change in earnings over assets is a variable that contrasts strongly with shareholder value or that it is a performance measure that captures mostly long term growth objectives. However, we include it because it serves as a performance measure that is less directly related to shareholder value and to create comparability with most other similar studies. We do interpret the growth of sales variable as a proxy for the use of growth of the firm as performance variable. The loss dummy serves to capture situations where the company does not generate enough earnings to even pay back its debt holders. Lack of sensitivity with respect to this variable would be a clear sign of a lack of accountability of the overall system and as a sign of severe entrenchment. 7

8 Our accounting data go back to Using the board turnover data we presented before, we use these performance variables in a logit regression, where we pool all observations into one data set. The dependent variable is always a dummy variable, which equals one if the fraction of management board turnover is at least 0.33 and if the CEO or Chairman leaves the board. We use current performance as well as lagged performance. We only focus on non-standard board turnover which is defined as before (i.e. correcting for death and illness, age-limit induced turnover and retirements). We run separate regressions for each performance variable. Table 2 reports the results. The (logit) results for non-standard CEO turnover show that poor short-term stock price performance and earnings performance significantly increase the probability of CEO turnover. The results for significant changes of the management board show a similar pattern. The data indicate that management turnover responds almost immediately to poor performance. The Dutch corporate governance system therefore seems to result in vigilance towards management. Both recent stock price performance as well as earnings performance are factors in explaining non-standard management turnover. The results reported here are in similar to the ones reported by other studies. Kaplan (1994a,b) also finds that management and CEO turnover in Japan and the US is related to stock price performance, the incidence of losses, and changes in earnings over assets. The sensitivity of CEO turnover to earnings losses in The Netherlands is strikingly similar to one reported by other studies. Kaplan (1994a,b) and Renneboog et al (1998) find that the probability of the CEO leaving the firm after a loss in either the previous period or the period before increases with at about percentage points in Germany, Japan, the UK and the US. Our logit results imply similar magnitudes for recent losses. 4. Ownership Structure and Board Turnover 8

9 In this section we analyze the role of ownership structure for board turnover. We first analyze how the concentration of shares affects board turnover. This will reveal whether or not the ownership structure affects board turnover and is informative about who seems to exercise control. We then analyze whether ownership structure also affects the board turnover-performance relation, again using cash flow rights concentration as well as voting rights concentration. See Table 3 for a description of ownership structure in The Netherlands. Table 4 for the relation between Management Board turnover and ownership concentration. Table 5: The effect of the interaction between corporate performance and ownership structure on management turnover. 4 One-share-one Vote and Management Board Turnover Table 6 shows the distribution of voting rights across blockholders, to be contrasted with Table 3. Figure 3: Violation of one-share-one-vote across firms. Table 7: Ownership concentration in firms with and without a high degree of violation of one-share-one-vote. Table8: Effect of the voting rights structure on management turnover and the corporate performance-management turnover relation. 5 Bank Control and Management Turnover. The potential for bank control is measured by the presence of a banker on the supervisory board of a firm and through the amount of short-term bank debt in the capital structure of the firm. 9

10 We check whether management turnover if affected by our measures of the tie with banks when cash flow performance is poor relative to the amount of debt outstanding. That is, is there an effect on management turnover from the interaction between poor cash flow-debt coverage and the potential for bank control? See Table 9 and

11 References Admati, Anat, Paul Pfleiderer and Josef Zechner (1994), ''Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium'', Journal of Political Economy 102, pp Agrawal, Anup and Charles R. Knoeber (1996), ''Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders'', Journal of Financial and Quantitative Analysis 31, Charkham, J. (1994), Keeping Good Company, a Study of Corporate Governance in Five Countries, Clarendon Press, Oxford. Denis, David J., Diane K. Denis and Atulya Sarin (1997a), ''Ownership Structure and Top Management Turnover'', Journal of Financial Economics 45, Franks, Julian and Colin Mayer (1997), ''Ownership, Control and the Performance of German Corporations'', mimeo. Franks, Julian, Colin Mayer and Luc Renneboog (1995), ''The Role of Large Share Stakes in Poorly Performing Companies'', mimeo. Franks, Julian, Colin Mayer and Luc Renneboog (1998), ''Who Disciplines Bad Management'', mimeo. Huddart, Steven (1993), ''The Effect of a Large shareholder on Corporate Value'', Management Science 39, pp Kang, Jun-Koo and Anil Shivdasani (1997), ''Corporate Restructuring During Performance Declines in Japan'', Journal of Financial Economics 46, Kaplan, Steven N. (1994a), ''Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States'', Journal of Political Economy 102, Kaplan, Steven N. (1994b), ''Top Executives, Turover, and Firm Performance in Germany'', Journal of Law, Economics and Organization 10, Kaplan, Steven N. (1997), ''Corporate Governance and Corporate Performance: A Comparison of Germany, Japan, and the US'', Journal of Applied Corporate Finance 9, Renneboog, Luc (1996), ''Ownership, Managerial Control and the Governance of Poorly Performing Companies Listed on the Brussels Stock Exchange'', mimeo. Shleifer, Andrei and Robert W. Vishny (1995), ''A Survey of Corporate Governance'', Journal of Finance

12 Table 1: Annual Average Management Board Turnover as a Fraction of Board Size, Annual Average Fraction Management Board Turnover Management Board Turnover Management Board: Death and Illness Turnover Management Board: Age Limit Induced Turnover Management Board: Retirement Non standard Management Board Turnover CEO Turnover CEO Turnover: Death and Illness CEO Turnover: Age Limit Induced CEO Turnover: Retirement Non standard CEO Turnover Average Size of Management Board 2.58 Average Size of Supervisory Board

13 Table 2: Turnover of CEO and Management Board and Performance Variables. Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Regressions are separate for each performance variable. Stock returns are market adjusted, changes in earnings are changes in earnings before taxes and the loss dummy equals one if earnings before taxes are negative. All turnover data exclude turnovers due to age-limits for board members, death and illnesses and retirements. CEO (Logit) Management Board (Logit) Coeff. Log L Coeff. Log L [S.E.] [N] [S.E.] [N] Market Adj. Stock Return Constant *** *** [.156] [.126] T [.405] [.354] T-1 *** **.869 [.442] [.385] T-2 ** [.432] [705] [.372] [700] Change in Earnings over Assets Constant *** *** [.146] [.122] T ** [2.494] [2.301] T-1 *** *** [2.772] [2.444] T [3.062] [690] [2.660] [685] Loss Dummy Constant *** *** [.158] [.131] T *** [.413] [.408] T **.869 [.448] [.407] T [.5631] [693] [.462] [688] Growth of Sales Constant *** *** [.164] [.136] T [.008] [.006] T-1 *-.016 **-.017 [.009] [.008] T [.006] [610] [.005] [605] *** significantly different from zero at the 1% level, ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 13

14 Table 3: Ownership Concentration of Listed Firms in The Netherlands (1992). Summary statistics for the total sum of disclosed blocks, classified by shareholders type. Blocks are only disclosed in The Netherlands if they exceed 5% of the total of shares. Other Financial Institutions are mainly private investment companies. Total Insider Holdings is constructed by summing all blocks of both boards. 'Other' refers to blocks held by the state or local government, foundations, employee participation funds and to blocks we were unable to classify by owner type. Mean Median Minimum Maximum Mutual Funds Banks/Insurance Companies Pension Funds Other Financial Institutions Management Board Supervisory Board Total Insider Holdings (both Boards) Individuals Non Financial Company Other Largest Block Largest 3 Blocks Largest 5 Blocks All Blocks (Total Ownership Concentration)

15 Table 4: Management Board Turnover and Ownership Concentration Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Blockholders are shareholders who own more than 5% of the cash flow rights of a firm. Management board and supervisory board blocks includes the blocks held by individual board members, family members and through investment companies owned by board members. Other Financial Institutions are mainly private investment companies. All turnover data exclude turnovers due to age-limits for board members, death or illnesses and retirements. CEO (OLS) Management Board (OLS) Coeff. Log L. Coeff. Log L Blockholder [S.E.] [N] [S.E.] [N] Constant *** *** [.279] [.227] Mutual Funds [.028] [.022] Banks/ Insurance Companies [.100] [.009] Pension Fund [.054] [.055] Other Financial Institutions [.008] [.008] Management Board [.009] [.007] Supervisory Board [.010] [.010] Individual ** [.012] [.011] Non Financial Company [.006] [834] [.005] [828] *** significantly different from zero at the 1% level ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 15

16 Table 5: Interaction of Corporate Performance and Ownership structure and Management Turnover. Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Performance is measured by the market adjusted stock price performance in the year before the turnover observation. Blockholders are shareholders who own more than 5% of the cash flow rights of a firm. Management board and supervisory board blocks includes the blocks held by individual board members, family members and through investment companies owned by board members. Other Financial Institutions are mainly private investment companies. All turnover data exclude turnovers due to age-limits for board members, death or illnesses and retirements. CEO (Logit) Man. Board (Logit) Coeff. Coeff. Blockholder [S.E.] [S.E.] Constant *** *** [.283] [.224] Stock Price Performance [.820] [.658] Banks/Insurance Company [.011] [.010] Other Financial Institution [.009] [.008] Management Board [.011] [.008] Supervisory Board [.010] [.010] Individual ** [.013] [.012] Non-Financial Company [.007] [.005] Interaction: Performance * Bank/Insurance Comp [.026] [.024] Performance * Other Financial Inst [.035] [.033] Performance * Management Board [.029] [.024] Performance * Supervisory Board [.032] [.035] Performance * Individual [.044] [.042] Performance*Non-Financial Company [.021] [.017] Log Likelihood [N] [829] [823] *** significantly different from zero at the 1% level ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 16

17 Table 6: Voting Rights Held by Block Holders of Listed Companies in The Netherlands (1992). Summary statistics for the total sum of disclosed blocks of voting rights, classified by shareholder type. Blocks are only disclosed in The Netherlands if they exceed 5% of the total of voting rights. Voting rights held by administrative offices that issue depository receipts after separating cash flow rights from voting rights are excluded. Other Financial Institutions are mainly private investment companies. Total Insider Holdings is constructed by summing all blocks of both boards. 'Other' refers to blocks held by the state or local government, foundations, employee participation funds and to blocks we were unable to classify by owner type. Mean Median Minimum Maximum Mutual Funds Banks, Insurance Companies and Fin. Conglomerates Pension Funds Other Financial Institutions Management Board Total Supervisory Board Total Total Insider Holdings (both Boards) Individuals Company (other than the above) Other Largest Largest Largest All stakes (Total Voting Rights Concentration) Figure 1: Voting Rights Held by the Firm in Excess of the Equity Contribution of Board Members through Blocks in The Netherlands (1992). Voting rights in excess of the equity contribution of board member ownership is calculated as the total fraction of the votes under control of the firm (see Figure 2) minus the cash flow rights of insiders held through blocks. The firm can hold votes through blocks of members of the management and supervisory board or through administrative offices set up by the firm. These administrative offices hold the original shares of a company, separate the voting rights and cash flow rights, and issue depository receipts against the cash flow rights. Board member block holding includes blocks held directly by individual board members as well as the blocks held by the family of a board member or by investment companies owned by board members or their families. The total number of firms equals 156. Table 7: Ownership Concentration and Violation of the One-Share-One-Vote Principle (1992). Average ownership concentration for the total of disclosed blocks by different types of shareholders. Firms are classified with respect to the degree in which they violate the one-share-one-vote principle. Excess Voting Rights Insiders is calculated as the total fraction of votes under control of the firm minus the cash flow rights of insiders held through blocks. Blocks are only disclosed in The Netherlands if they exceed 5% of total shares. Other Financial Institutions are mainly private investment companies. Insiders relates to the total of blocks disclosed by members of the supervisory 17

18 and management board. 'Other' refers to blocks held by the state or local government, foundations, employee participation funds and to blocks we were unable to classify by owner type. Excess Voting Rights Insiders > 50% Yes No Mutual Funds Banks and Insurance Companies Pension Funds Other Financial Institutions Insiders Individuals Company (other than the above) Other Largest Shareholder Total Ownership Concentration Total Number of Firms

19 Table 8: Interaction of Corporate Performance, Voting Structure, One-Share- One-Vote and Management Turnover. Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Performance is measured by the market adjusted stock price performance in the year before the turnover observation. Excess Voting Rights > 33% is dummy variable that equals one if the total fraction of votes under control of the firm minus the cash flow rights of insiders held through blocks exceeds 33% of the total number of shares. Blockholders are shareholders who own more than 5% of the voting rights of a firm. Management board and supervisory board blocks includes the blocks held by individual board members, family members and through investment companies owned by board members. Other Financial Institutions are mainly private investment companies. All turnover data exclude turnovers due to age-limits for board members, death or illnesses and retirements. CEO (Logit) Man. Board (Logit) Coeff. Coeff. Blockholder [S.E.] [S.E.] Constant *** *** [.297] [.253] Stock Price Performance [.780] [.663] Excess Voting Rights > 33% [.341] [.289] Banks/Insurance Company [.013] [.010] Other Financial Institution [.009] [.008] Management Board [.011] [.009] Supervisory Board [.010] [.010] Individual [.013] [.012] Non-Financial Company [.007] [.006] Interaction: Performance * Excess Voting Rights * ** [.973] [.828] Performance * Bank/Insurance Comp [.029] [.023] Performance * Other Financial Inst [.033] [.032] Performance * Management Board [.030] [.024] Performance * Supervisory Board [.031] [.034] Performance * Individual [.055] [.052] Performance*Non-Financial Company [.023] [.018] Log Likelihood [N] [829] [823] *** significantly different from zero at the 1% level ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 19

20 Table 9: Turnover of CEO and Management Board, Cash Flow-Debt Coverage and Short Term Bank Loans in the Capital Structure of the Firm Sample consists of companies other than banks and insurance companies. Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Cash flow-debt coverage is contemporaneous. Regressions are separate for each debt coverage variable. All turnover data exclude turnovers due to age-limits for board members, death and illnesses and retirements. Interest Coverage: CEO (Logit) Management Board (Logit) Coeff. Log L Coeff. Log L [S.E.] [N] [S.E.] [N] Constant *** *** [.231] [.181] Interest Coverage *** [.031] [.006] Short Term Bank Loans/Assets [1.673] [1.471] Interaction Coverage-Short Term Bank Loans/Assets *** [.491] [577] [.402] [572] Short Term Debt Coverage: Constant *** *** [.282] [.265] Short Term Debt Coverage *** [.009] [.008] Short Term Bank Loans/Assets [1.535] [.167] Interaction Coverage-Short Term Bank Loans/Assets [.074] [583] [.065] [578] Total Debt Coverage: Constant *** *** [.282] [.257] Total Debt Coverage ***-.045 **-.019 [.012] [.010] Short Term Bank Loans/Assets [-.889] [1.385] Interaction Coverage-Short Term Bank Loans/Assets [.099] [550] [.086] [557] *** significantly different from zero at the 1% level, ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 20

21 Table 10: Turnover of CEO and Management Board, Cash Flow-Debt Coverage and Bankers on the Supervisory Board of the Firm Sample consists of companies other than banks and insurance companies. Turnover data for the years are pooled into one sample. The dependent variables are dummy variables equaling one if at least one third of the management board members leave the board or if the CEO leaves the management board. Cash flow-debt coverage is contemporaneous. Regressions are separate for each debt coverage variable. Supervisory Board equals one if the firm has a banker on the supervisory board, and zero otherwise. All turnover data exclude turnovers due to age-limits for board members, death and illnesses and retirements. Interest Coverage: CEO (Logit) Management Board (Logit) Coeff. Log L Coeff. Log L [S.E.] [N] [S.E.] [N] Constant *** *** [.171] [.151] Interest Coverage ***-.081 ***-.062 [.026] [.021] Supervisory Board ** [.730] [.602] Interaction Coverage- Supervisory Board * *** [.224] [595] [.021] [590] Short Term Debt Coverage: Constant *** *** [.214] [.193] Short Term Debt Coverage ***-.021 **-.013 [.007] [.006] Supervisory Board * [1.628] [1.227] Interaction Coverage- Supervisory Board ** [.099] [596] [.040] [591] Total Debt Coverage: Constant *** *** [.209] [.189] Total Debt Coverage ***-.036 ***-.022 [.010] [.008] Supervisory Board [1.242] [1.207] Interaction Coverage- Supervisory Board ** [.099] [563] [.042] [563] *** significantly different from zero at the 1% level, ** significantly different from zero at the 5% level * significantly different from zero at the 10% level 21