Vertical Interlocks of Executives and Performance of Chinese State Owned Firms

Vertical interlock and the value of cash holdings

“…In the case of China, related studies find evidence in both directions. Arnoldi et al (2013) show that vertically interlocked chairmen could improve firm value by enhancing return on assets of listed firms, whereas Chen et al (2015) find a positive relationship between vertical interlock and loan guarantees to related parties of controlling families, implying that vertical interlock facilitates tunnelling behaviours by controlling family business groups. In addition, Opie et al (2019) show a positive association between pyramidal layers and investment efficiency, but if the government tightens control through vertical interlock of chairman, the benefits will be largely offset, which suggests an unfavourable effect of vertical interlock.…”

Affiliated management and firm value: Evidence from China

“…The dependent variable LoanRPT_FREQ in model 2 of Table 6 is the frequency of loan-based RPTs in a calendar year. To be consistent with Arnoldi et al (2013), we also control for AGE in the two models. AGE measures how long the firm has been listed.…”

“…Affiliated management may increase firm value by alleviating this kind of agency problem between management and shareholders (Anderson & Reeb, 2003). Meanwhile, affiliated management can be regarded as a vertical interlock between controlling shareholder and listed firms (Arnoldi, Chen, & Na, 2013), an interlock that may help the controlling shareholder to prop the operation performance of listed firms more easily and increase the firm performance. From above perspective, affiliated management may be positively associated with firm value.…”

“…First, we analyse the effect of affiliated managers on firm value based only on agency theory, but there may be other theories that explain the relation between affiliated management and firm value. For example, the affiliated managers may be recognised as a direct vertical interlock between the controlling groups and the listed firms and this kind of interlock may affect firm value (Arnoldi et al, 2013). Secondly, the findings in this paper suggest that even though affiliated management may enhance the ability of shareholders to monitor managers (decrease the type I agency problem) and increase the operational profitability, it can facilitate the controlling shareholder to expropriate the minority shareholders (increase the type II agency problem) and reduce the firm value eventually in a transition economy.…”