Firm Performance, Governance Structure, and Top Management Turnover in a Transitional Economy*

Abstract

Recent research has argued that political and regulatory environments have a significant impact on corporate governance systems. In particular, countries with poor investor protection laws and weak law enforcement have low levels of corporate governance that manifests itself in substandard financial performance, management entrenchment, and the expropriation of minority shareholders. One implication of this research is that China will have poor corporate governance and entrenched managers as its legal system is relatively underdeveloped and inefficient. However, using data on top management turnover in China's listed firms, our results refute the prediction of entrenched management. We find evidence of very high turnover of company chairmen and there are many cases that we interpret to be forced departures. Our results show that chairman turnover is related to a firm's profitability but not to its stock returns. Turnover-performance sensitivity is higher if legal entities are major shareholders but the proportion of non-executive directors perversely affects it. We find no evidence that profitability improves after a change in chairman and this suggests that a firm's governance structure is ineffective as it is unable to recruit suitable replacements that can turn around its financial performance. Copyright Blackwell Publishing Ltd 2006.

Empirical Research on Corporate Governance in China: A Review and New Directions for the Future

“…In addition, there are studies showing duality to be positively related to firm performance (Berkman et al, 2010;Peng, 2004;Peng et al, 2007;Tian & Lau, 2001), contrary to the agency prediction about the impact of CEO duality. Although several studies find that duality is negatively related to board independence and executive turnover (Chen & Al-Najjar, 2012;Firth et al, 2006b;Shen & Lin, 2009;You & Du, 2012;Zhang, Ji, Tao, & Wang, 2011), their findings may have been an artifact of ownership concentration given its significant impact on the composition of the boards of directors . Overall, there is little evidence that duality increases CEO power and weakens corporate governance in the listed firms in China.…”

“…For example, firm performance is generally found to be positively related to executive pay (Buck et al, 2008;Conyon & He, 2011Cordeiro et al, 2013;Firth et al, 2007) and negatively related to executive turnover (Chang & Wong, 2009;Firth et al, 2006b;Lau et al, 2007;Pi & Lowe, 2011;Shen & Lin, 2009;You & Du, 2012;. Moreover, financial fraud also increases the risk of CEO turnover (Firth et al, 2011).…”

“…Although some studies find board independence to relate positively to executive turnover (Firth et al, 2006b;Lau, Fan, Young, & Wu, 2007;You & Du, 2012) and negatively to expropriation (Shan, 2013), earnings management (Liu & Lu, 2007), and financial fraud (Chen et al, 2006), most studies find it to be insignificant in executive compensation Conyon & He, 2011Markoczy et al, 2013), strategic decisions (Chen & Cheng, 2007;Jia & Zhang, 2011;Li, Wright, & Scholes, 2010;Yeh et al, 2009), financial fraud (Ding et al, 2010;Firth et al, 2011;Huyghebaert & Wang, 2012;Jia et al, 2009), or firm performance (Du, 2013;Gang, 2007;Hu et al, 2010;Li & Naughton, 2007;Shen & Lin, 2009;Tian & Lau, 2001;Xu, Zeng, & Zhang, 2011).…”

“…Given that the boards of directors are generally ineffective in corporate governance and that ownership concentration has significant impact on board composition and managerial incentives Conyon & He, 2011Cordeiro et al, 2013;Firth et al, 2007;Pi & Lowe, 2011;You & Du, 2012), as we pointed out above, controlling shareholders are likely to play an important role in holding managers accountable for firm performance. Meanwhile, there is evidence that the sensitivity of executive pay to firm performance tends to be low (Firth et al, 2006a) and that executive turnover often does not lead to an increase in firm performance (Firth et al, 2006b;Shen & Lin, 2009;Wang, 2010). Future research may examine not only what factors cause executive turnover but also what happens to executives after they step down from the job.…”

“…The same is true about the relation between state ownership and executive turnover. Some studies find it to be negative (Pi & Lowe, 2011;Shen & Lin, 2009;You & Du, 2012), but others find it to be insignificant (Chang & Wong, 2009;Firth, Fung, & Rui, 2006b). There is also evidence that state ownership is not significantly related to board structure such as independence, size, or board meeting frequency (Chen & Al-Najjar, 2012;Ding et al, 2010).…”