Controlling families exist widely in both publicly traded stocks and closely held stocks and have been shown to be an important corporate governance mechanism (e.
However, the interaction of ROA and the dummy for nonfamily-owned closely held stocks is positive and significant in column (6), rejecting Hypothesis 1 that closely held and publicly traded nonfamily-owned stocks have the same nonroutine turnover-performance sensitivity and providing evidence that stock market monitoring leads to higher turnover-performance sensitivity than monitoring by a small group of owners.
Although publicly traded stocks have the most widely diffuse ownership and have been mostly widely studied in literature, the most popular firm structure in the United States is the closely held stock firm (Nagar, Petroni, and Wolfenzon, 2011).
Overall, the effectiveness of disciplining CEOs of closely held stock firms stems mainly from monitoring by a relatively small number of owners who are familiar with and involved in the management, while the capital market enhances the effectiveness of corporate governance mechanisms of publicly traded stock firms.
Hypothesis 2-2: Compared to peers in nonfamily-controlled closely held stock firms, a nonfamily CEO in a family-controlled closely held stock firm is more likely to be removed and has higher turnover-performance sensitivity.
A closely held stock firm is defined as a family firm if the information from the "Management" section of Best's Insurance Reports gives explicit detailed information about family ownership.
Roughly 75 percent of closely held stock insurers are owned by controlling families.
Thus, the results do not support the part of Hypothesis 2-2 predicting that nonfamily CEOs in closely held family stock firms are more likely to be removed than CEOs of nonfamily-owned closely held stock firms.
Combining this result with the significant positive interaction of ROA and the dummy for closely held nonfamily-owned stocks, we find evidence supporting the part of Hypothesis 2-2 predicting that turnover-performance sensitivity is higher for family-owned closely held firms with nonfamily CEOs than for nonfamily-owned closely held stock firms.
This result rejects Hypothesis 1 that nonfamily-owned publicly traded stock insurers have similar nonroutine turnover rates and likelihoods of removing poorly performing CEOs in comparison to nonfamily-owned closely held stock insurers.