JOURNAL OF POLITICAL ECONOMY TABLE 2 PERFORMANCE SHIFT TESTS FOLLOWING MANAGER MOVEMENT Model:Yx=α1+β1+yxn+l Cat (j) N R2 1635** (3 2. Not demoted 0777* 7410 3. Promoted 1195* 1,933 7 (243) 4, Moved laterally or retired 67* 3,762 detailed specifications. Yu in year t; X,-1 if otherwise;and N,n T is the effective total sample size, where n is the number of different firms in category t Includes the categories promoted, moved laterally, or retired plus"other"(nonresponses and other nonspecific esponses). all cases--as suggested by the improved managerial incentives un- der the new contract-but the magnitude of improvement was sev eral times greater if the previous manager had been demoted. Fur thermore, the increase in performance was less significant if, in contrast, the previous manager had been promoted, suggesting that the previous managers'performance, even with improved? there might be less opportunity for the new manager to im centives Thus demotion and promotion of managers appear to be closely re- lated to firm performance relative to potential under that manager In contrast with the group of managers who were demoted, the group of auctioned firms as a whole did not show such a dramatic improvement in performance. However, closer analysis reveals a dif- ference in postauction performance between firms in which the in cumbent manager won the auction (55 percent of the auctioned firms)and those for which a new manager won. Table 3 shows that firms in which the new manager won experienced no significant im- provement in performance, but those in which the incumbent won did. This result suggests a type of adverse selection mechanism at work(exactly as in the models of Engelbrecht-Wiggans, Milgrom, and Weber [1983] and Hendricks and Porter [1988]). Given a group of auctioned firms that look roughly the same to an outsider, these firms will attract roughly equivalent bids from outsiders. However, incum- The Engelbrecht-Wiggans et al. and the Hendricks and Porter models predict that the incumbent wins at least 50 percent of the time; in our data the incumbent won 55 percent of the auctions