CEO Turnover, Forced Chairman Replacements and Firm Performance : Case of the Costa Rican Banking System

The paper examines the effectiveness of corporate governance mechanisms in the Costa Rican banking sector, an industry characterised by fully outside boards. Using a rich data set from the Costa Rican Central Bank for the period 1999-2004, we carry out a regression analysis using the GMM technique in order to address endogeneity and firm-specific effects. The main contribution of the paper indicates that corporate governance matters for improving performance. Empirical findings indicate that investors view forced Chairman departure followed by an outsider and the appointment of an outside CEO as positive events, since these events create the conditions for organisational change leading to significant improvements in firm performance. In addition, results suggest that forced replacement of board members is an abrupt process that creates costs that outweigh its benefits