Who disciplines management in poorly performing companies?

Economic theory points to five parties disciplining management of poorly pe rforming firms: holders of large share blocks, acquirers of new blocks, bid ders in takeovers, nonexecutive directors, and investors during periods of financial distress. This paper reports the first comparative evaluation of the role of these different parties in disciplining management. We find tha t, in the United Kingdom, most parties, including holders of substantial sh are blocks, exert little disciplining and that some, for example, inside ho lders of share blocks and boards dominated by nonexecutive directors, actua lly impede it. Bidders replace a high proportion of management of companies acquired in takeovers but do not target poorly performing management. In c ontrast, during periods of financial constraints prompting distressed right s issues and capital restructuring, investors focus control on poorly perfo rming companies. These results stand in contrast to the United States, wher e there is little evidence of a role for new equity issues but nonexecutive directors and acquirers of share blocks perform a disciplinary function. T he different governance outcome,,, are attributed to differences in minorit y investor protection in two countries with supposedly similar common law s ystems. (C) 2001 Academic Press.