The Value Relevance of Top Executive Departures : Evidence from the Netherlands

On theoretical grounds, internal monitoring of top executives by the supervisory board is expected to result in positive abnormal returns subsequent to the announcement of their unanticipated forced departures. The empirical evidence is ambiguous and we analyze three non-competing explanations for this ambiguity: (i) The positive effect on firm value of internal monitoring is hidden in stock price effects due to the simultaneous occurrence of the positive real effect of monitoring and the opposing information effect. (ii) The interrelation between external and internal control prevents assessing the value relevance of internal monitoring in isolation. Moreover, the active role of shareholders prevents assessing the relevance of the board's role in the internal monitoring process. (iii) The confounding effect of a simultaneous successor appointment typically generates an upward biased estimate. Based on an analysis of price effects and trading volumes at announcement, we conclude that monitoring by the supervisory board is valued by investors: forced departures of executive directors, also without a successor appointment, are value relevant in the Netherlands where external control mechanisms and shareholder control are virtually absent. A general implication of our analysis is that the value relevance of a certain event can often not properly be refuted without analyzing trading volumes