Organizational Form, Ownership Structure, and CEO Turnover: Evidence From the Property–Casualty Insurance Industry

• DOI: http://doi.org/10.1111/jori.12083
• Published date: 01 March 2017
• Author: J. David Cummins,Jiang Cheng,Tzuting Lin
• Date: 01 March 2017

ORGANIZATIONAL FORM,OWNERSHIP STRUCTURE,AND

CEO TURNOVER:EVIDENCE FROM THE PROPERTY–

CASUALTY INSURANCE INDUSTRY

Jiang Cheng

J. David Cummins

Tzuting Lin

ABSTRACT

We investigate the role of organizational form and ownership structure in

corporate governance by examining CEO turnover for U.S. property–

casualty insurers. Our article extends the prior literature by decomposing

stock insurers into publicly traded and nonpublicly traded (closely held)

entities and breaking down both types of stocks into family-owned and

nonfamily-owned categories. We further subdivide family firms into those

with family-member CEOs and those with nonfamily CEOs. We find that the

probability of nonroutine turnover has a significant negative relationship

with firm performance. Turnover probabilities vary significantly by

organizational form and ownership structure. Family firms with family-

member CEOs have the lowest turnover rate of any ownership type. The

probability of nonroutine CEO turnover is lower for mutuals than for

publicly traded nonfamily stock firms and also for all other types of stocks

except closely held family stock firms and publicly traded family stocks with

family-member CEOs. The results provide further evidence that organiza-

tional form matters in terms of controlling agency costs in financial services

firms.

Jiang Cheng is Associate Professor at Shanghai University of Finance and Economics. J. David

Cummins is the Joseph A. Boettner Professor of Risk Management and Insurance at Temple

University. Tzuting Lin is Assistant Professor at National Taiwan University. The authors can

be contacted via e-mail: cheng.jiang@shufe.edu.cn, cummins@temple.edu, and tzuting@ntu.

edu.tw. All authors are Research Fellows at the Risk and Insurance Research Center, College of

Commerce, National Chengchi University. We would like to thank Patricia Born, Georges

Dionne, Elyas Elyasiani, Vidhan Goyal, Martin Grace, and participants at the 2013 AEA

meeting, 2012 ARIA meeting, 2012 APRIA meeting, 2012 NTU International Conference on

Finance, and seminars at National Taiwan University, Southwestern University of Finance and

Economics, Tsinghua University, and Yuanze University for helpful comments and

suggestions. We are also grateful to two anonymous reviewers for constructive comments,

which helped to improve the article. This paper won the Harold Skipper Best Paper Award at

2012 APRIA meeting and the Best Paper Award at 2012 NTUICF meeting.

© 2015 The Journal of Risk and Insurance. Vol. 84, No. 1, 95–126 (2017).

DOI: 10.1111/jori.12083

95

INTRODUCTION

A firm’s corporate governance mechanisms play an important role in disciplining

poorly performing chief executive officers (CEOs). Extant literature shows that

stronger corporate governance mechanisms discipline management effectively by

removing poorly performing CEOs and searching for the best candidate for the CEO

position. Therefore, CEO turnover decisions provide an excellent setting to evaluate

the quality of corporate governance mechanisms within a firm (Kang and Shivdasani,

1995).

Most previous studies examining the association between the quality of corporate

governance mechanisms and CEO turnover decisions have focused only on publicly

traded stock companies (e.g., Weisbach, 1988; Denis, Denis, and Sarin, 1997;

Borokhovich, Parrino, and Trapani, 1996). Less is known about CEO turnover

patterns and their association with performance within firms with organizational

forms and ownership structure other than publicly traded stocks. Among 7 million

corporate tax filers in the United States, only about 8,000 are publicly traded (Nagar,

Petroni, and Wolfenzon, 2011). Because of the significance of nonpublicly traded

firms in the U.S. economy, understanding the CEO turnover patterns within these

firms would appear to be an important issue for investigation. This study intends to

fill this research gap by examining the characteristics of CEO turnover in the U.S.

property–casualty (P–C) insurance industry, in which various organizational forms

and ownership structures coexist.

The present article focuses on how insurers’ organizational forms and ownership

structures affect the quality of corporate governance mechanisms, proxied by CEO

turnover probabilities and turnover-performance sensitivity. In this regard, we

distinguish between routine and nonroutine turnover and emphasize nonroutine

turnover as especially indicative of governance differences among firms. The

insurance industry provides a particularly rich environment for the analysis of

organizational form because a variety of organizational forms coexist in the industry,

including stocks, mutuals, and reciprocals (Mayers and Smith, 1988). Moreover, stock

insurers have a full spectrum of ownership structures depending on the liquidity of

ownership and the presence of controlling shareholders. Stock insurers owned by

noninsurance holding companies provide an additional interesting ownership

structure.

There has been one prior paper on the relationship between CEO turnover and

performance in the insurance industry. He and Sommer (2011) examine the impact of

ownership structure on the performance–turnover relationship for U.S. P–C insurers,

focusing on the stock and mutual organizational forms. Our article extends He and

Sommer (2011) by decomposing stock insurers into publicly traded and nonpublicly

traded (closely held) entities and breaking down both types of stocks into family-

owned and nonfamily-owned categories. We further subdivide family firms into

those with family-member CEOs and those with nonfamily CEOs. We also consider

stock insurers owned by noninsurance entities as a separate organizational type. This

more detailed decomposition of stock insurers allows us to provide a richer analysis

of the effects of organizational form on CEO turnover than has been provided in the

prior literature. Thus, ours is only the second article to study organizational form and

96 THE JOURNAL OF RISK AND INSURANCE

CEO turnover in the insurance industry and the first article to consider the effects of

family ownership on CEO turnover for insurers. Our article also contributes more

broadly as one of the limited number of papers to analyze CEO turnover for private

firms and privately held family firms (see also Lausten, 2002; Coles et al., 2003;

Bennedsen et al., 2007; Adams et al., 2013).

The analysis in this article is based on a large hand-collected data set, which covers

976 firms in the U.S. P–C insurance industry over the period 1993–2006. We conduct

probit regression to study the impact of organizational form and ownership structure

on CEO turnover decisions. Our findings suggest that the likelihood of CEO turnover,

especially nonroutine turnover, is inversely related to firm performance in the

insurance industry. Most important, we find that the magnitude of this association

varies significantly by organizational form and ownership structure. Compared to

publicly traded nonfamily-controlled stocks, mutuals have lower likelihoods of

nonroutine CEO turnover. We also find that closely held nonfamily stocks have

lower nonroutine turnover-performance sensitivity than publicly traded nonfamily

stocks.

Finally, whether there is a controlling family matters in the CEO turnover decision.

Controlling families ex ist widely in both publicly tr aded stocks and closely

held stocks and have been sh own to be an important corporate governance

mechanism (e.g., Anderson and Reeb, 2003; Li and Sri nivasan, 2011). On the one

hand, controlling famili es in stock insurance compan ies are entrenched. The

probability of CEO turno ver is lowest for family-m ember CEOs in family-

controlled firms, both cl osely held and publicly tr aded. On the other hand,

controlling families ca n be effective monitors o f management when they do

not hold the CEO positi on. Nonfamily-member CEOs of publicly trade d

family firms have one of th e highest likelihoods of turnover. This suggests that

monitoring from both cap ital market and control ling shareholder (hold ing

family) plays an important role in improving the quality of a firm’s corporat e

governance.

The remainder of the paper is organized as follows. In the second section, we

discuss the relevant literature. The third section develops the hypotheses based

on prior literature. The fourth section describes the data set and methodology.

The fifth section provides the results and discussion, and the sixth section

concludes.

LITERATURE REVIEW

We first briefly review the literature about CEO turnover in publicly traded stock

companies. We then consider the papers that also analyze nontraded firms.

Top Executive Turnover in Publicly Traded Companies

Over the past 3 decades, a large body of literature has developed on different aspects

of CEO turnover in publicly traded industrial firms. The general consensus is that the

likelihood of CEO turnover, especially nonroutine turnover, is negatively related to

firm performance (Coughlan and Schmidt, 1985; Warner, Watts, and Wruck, 1988;

EVIDENCE FROM THE PROPERTY–CASUALTY INSURANCE INDUSTRY 97