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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|18520||2006||14 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Money and Finance, Volume 25, Issue 3, April 2006, Pages 445–458
Contract theory suggests that firm performance can be improved by appointing new managers and/or by introducing better incentives. Furthermore, these two changes should be complementary – their effects reinforce each other. Using data on privatized firms in the Czech Republic, this paper presents results that suggest complementarity between the appointment of new managers and introduction of incentives in a transition economy. The results also show that ignoring the complementarity may lead to the wrong conclusion that the effect of incentives is weak. Managerial incentives seem to work only after the new post-privatization managers are appointed.
This paper analyzes managerial replacement as a tool that new private owners can use to improve firm performance after privatization. In general, firm performance depends on both managerial ability and efforts (Laffont and Tirole, 1986). To induce the manager to increase effort, the owner (the principal) can introduce incentives such as performance-dependent pay/bonuses, promotion/reappointment if performance is good and demotion/dismissal if it is bad. Thus, theory predicts that firm performance can be improved in two ways: by appointment of more capable managers or by introduction of stronger incentives. However, McAfee and McMillan (1987) argue that these two instruments are in fact complementary so that new managers and better incentives reinforce each other. The complementarity of human capital and incentives plays an especially important role during the post-communist transition: “Reforms are interlinked. The various incentive mechanisms that constitute a market system can complement or substitute for each other. … [S]tronger incentives and better managers are complementary changes. They might be so complementary that neither change would be effective by itself. Some managers might be so inadequate as to be unable to respond to new incentives, no matter how well designed. Good managers might not work well under badly structured incentives. If so, restructuring is effective only if both changes – new managers and new incentives – are introduced together.” (McMillan, 1997, pp. 210 and 215) Managerial incompetence and lack of motivation constitute two important sources of inefficiency of state firms in a planned economy. Thus, firm restructuring should focus both on the introduction of stronger incentives and on appointment of competent managers (McMillan, 1997 and Roland, 2000). But which one of the two should receive priority? So far, empirical evidence on restructuring in transition is predominantly in favor of the view that the new human capital is more important than incentives.1 Often, introduction of new managers is associated with better firm performance whereas the evidence for incentives is weak. However, failure to account for the complementarity between human capital and incentives may lead to misleading conclusion that better incentives do not work and that the appointment of new managers is more important. Our paper sheds some new light on the relative roles of human capital and incentives and interactions between them in firm restructuring. Compared to the previous literature,2 we employ an approach often used in the finance literature that examines the sensitivity of managerial change to past firm performance (see, for example, Denis and Denis, 1995).3 This methodology addresses the impact of negative incentives embodied in high sensitivity of managerial change to poor past performance. We find that the negative managerial incentives start working only after the incumbent pre-privatization manager has been replaced by a new, presumably more competent manager. In particular, our analysis shows that the first post-privatization managerial change is not sensitive to poor past performance. In contrast, poor past performance significantly increases the probability of manager's dismissal for the second and subsequent changes of the top manager (in firms where the new private owners had already introduced a new manager). This indicates that the new incentives kick in only after the first post-privatization managerial change, which suggests that human capital and incentives are indeed complementary. One important shortcoming of the paper is that we do not have data on positive incentives of managers, such as their remuneration package. Results that would show that only the new post-privatization managers respond positively to performance-sensitive remuneration would provide even stronger support for the hypothesis of complementarity between incentives and new human capital. Unfortunately, such data are not available. Nevertheless, we believe that our results, while falling short of giving indisputable proof, nonetheless provide convincing suggestive evidence in support of complementarity, and will hopefully motivate future research with more suitable data. The theory predicts that complementarity of managerial talent and incentives is a general economic phenomenon (McAfee and McMillan, 1987 and Laffont and Tirole, 1986). Therefore, we believe that our results suggesting that the new managers and incentives are complements, although obtained in the specific conditions of a transition economy, could be generalized for broad economic conditions. Nevertheless, we would like to note that transition provides a unique quasi-experimental setting for our test. In transition, all existing state-owned enterprises experience a simultaneous shock and are, therefore, induced to restructure at the same point in time. They are all generally inefficient, in need of better managers and better incentives, and face the same general economic conditions. Furthermore, all firms in our data set were privatized through the Czech voucher privatization program. This provides us with uniquely suitable empirical setting and simplifies the analysis. The article proceeds as follows. Section 2 introduces the data. Section 3 shows basic univariate results supporting complementarity of incentives and human capital. Even though the full sample results indicate only weak support for negative incentives in the form of low sensitivity of managerial change to poor past performance, a more detailed analysis reveals that after the new post-privatization managers are introduced, further managerial changes are sensitive to past performance. Regression analysis in Section 4 confirms this result. Section 5 concludes.
نتیجه گیری انگلیسی
In this paper, we provide empirical evidence on complementarity between new managers and managerial incentives. According to contract theory (for example models by Laffont and Tirole, 1986 and McAfee and McMillan, 1987), firm performance is a function of manager's ability and effort. Therefore, both appointment of new managers and introduction of new incentives should lead to improved firm performance. An important feature of the two changes, however, is that they may work as complements and reinforce each other. If that is the case, the effect of either change becomes stronger after the other change has been also introduced. This paper provides evidence suggesting there is indeed complementarity between human capital and incentives in privatized firms in the Czech Republic. We show that the relationship between past performance and managerial turnover strengthens after the appointment of the first post-privatization managing director. Before the first managerial change, past performance has no bearing on the probability of managerial turnover, indicating weak disciplining role of CEO replacements. After the change, however, past firm performance turns out to be negatively and significantly correlated with the probability of managerial change. Moreover, our data show that firms without a change of the managing director over the 6 years after the privatization perform worse than the firms that replaced their managing directors. We interpret these findings as evidence suggesting that the appointment of new managers and introduction of incentives are strongly complementary changes. Managerial replacements do not seem to work as disciplinary tools (negative incentives) before the new manager is introduced. Thereafter, however, the managers who perform poorly are at a higher risk of replacement. Empirical studies on human capital and incentives in transition tend to conclude that the new human capital is more important than the new incentives. Our analysis suggests that the failure of previous studies to find evidence on the impact of managerial incentives may be a direct consequence of the strong complementarity between the two changes. Taking complementarity of new managers and incentives into account may lead to different conclusions.