Does executive directors from controlling shareholders improve corporate governance?

Abstract

Purpose The existence of controlling shareholders creates a remarkable difference between the corporate governance structures of Chinese firms and those of western firms. Despite the increasing importance of controlling shareholders, it remains disputable whether they are playing the “tunneling” roles or the “governance” roles. Therefore, more research is needed on what roles controlling shareholders are playing and how they play their roles. Previous empirical studies document a common phenomenon that directors play dual roles both on the board and in the top management team. Because of information asymmetry, the board of directors may not be able to perform its supervisory and strategic decision-making functions. Therefore, this paper aims to investigate whether controlling shareholders participate in firm management by appointing the executive directors and examine the economic consequences of controlling shareholder involvement. Design/methodology/approach In the empirical tests, the authors use the split share structure reform in China as a natural experiment. Using the data from Chinese listed firms between 2001 and 2015 and difference-in-differences analysis, the authors examine the impact of the split share structure reform on the executive directors of controlling shareholders and the governance effect of controlling shareholders’ appointing executive directors to the management. Findings The authors find that controlling shareholders get involved in firm management by appointing executive directors to strengthen the supervision and incentives of managers. The authors also find that firms exhibit a lower level of earnings management and enhance and higher pay-performance sensitivity after controlling shareholders appoint executive directors to the top management team. Originality/value As the natural experiment of the split share structure reform enables us to mitigate endogeneity, the authors investigate the channels through, which controlling shareholders get involved in firm management from the unique perspective of executive director appointment. The study expands the literature on corporate governance and board functions. The findings provide new insights to the effect of controlling shareholder governance and casts light on a new way for controlling shareholders of Chinese firms to participate in firm management – by appointing executive directors.

Ownership Structure and Earnings Management Practices: An Empirical Evidence

“…It's possible that Managers may be under pressure to ensure that the company achieves positive financial results when blockholders are closely watching the company's financial issues. Empirically, this study is inconsistent with previous studies document an effect of the OC in preventing opportunistic EM (Pugatekaew, 2021;Piosik & Genge, 2020;Guangguo, et al, 2019;Martin & Reyna, 2018;Grimaldi & Muserra, 2017;Parveen, et al, 2016;Wang, et al, 2015).…”

“…Hence, OC is a significant internal mechanism of CG as it determines the power and control between the management and the owner (Jumreornvong, et al, 2019). Numerous other previous studies also examined the effect of OC on EM and earnings quality (Pugatekaew, 2021;Piosik & Genge, 2020;Guangguo, Ruiqi & Hezun, 2019;Grimaldi & Muserra, 2017;Parveen, et al, 2016;Wang, Cao & Ye, 2015). These studies indicates negative relationship between OC and and CG literature assume that the OS can be an effective means of manager's control (Zraiq & Fadzil, 2018;Gibson, 2014;Hayam & Khaled, 2013).…”

Pengaruh Pemisahan Hak Aliran Kas Dan Hak Kontrol Terhadap Manajemen Laba Akrual Dan Manajemen Laba Riil

“…Hal ini dikarenakan pemegang saham pengendali nantinya juga akan tetap menerima klaim keuangan sesuai dengan hak aliran kasnya. Pemegang saham pengendali juga percaya bahwa praktik manajemen laba riil yang dilakukan oleh pihak manajemen juga demi kesejahteraan pemegang saham dan badan usaha secara keseluruhan (Guangguo et al, 2019).…”

Economic Policy Uncertainty and Management

“…Although the executive compensation incentive scheme stimulates the executives to a certain extent, it also induces the motivation of the executives to manipulate earnings to obtain excess compensation [28]. Compared with nonexecutive directors, the executive director of the controlling shareholder has a stronger information advantage and can directly restrain the earnings management behavior of the managers [29].…”