CEO Turnover and Firm Performance in China’s Listed Firms (CRI 2009-012)

Manuscript Type: Empirical Research Question/Issue: This study investigates the relation between CEO turnover and firm performance in China’s listed firms. The study examines how the sensitivity of CEO turnover to firm performance is moderated by the private control of firms, the presence of a majority shareholder and the presence of independent directors on the board. Research Findings/Insights: Using a panel of about 1200 Chinese firms per year from 1999 to 2006 we find significant changes in the ownership and control of firms. The private control of firms and the fraction of independent directors on the board have increased considerably over time. The study finds a significant negative association between CEO turnover and firm performance consistent with the agency model. There is evidence that the CEO turnover sensitivity for poor performance is greater in firms that are privately controlled, or have a majority shareholder, or have a greater fraction of independent directors on the board. Theoretical/Academic Implications: This study provides empirical support for the agency model and the importance of internal corporate governance to attenuate agency costs. It provides important insights into firm governance in transition economies. Practitioner/Policy Implications: This study offers insights to policy makers interested in enhancing the design of internal corporate governance within transition economies

Multiple large shareholders, excess leverage and tunneling: evidence from an emerging market

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.Manuscript Type: Empirical Research Question/Issue: Past empirical efforts in corporate governance have examined the effects of large shareholders with the excess control rights on tunneling activities. However, no study has systematically investigated the effects of multiple large shareholders on excess leverage policies and tunneling in an emerging country environment where minority rights protection is weak. In this study, we examine the role of multiple large shareholders and the effects of control contestability of multiple large shareholders on firm excess leverage decision and tunneling by controlling shareholders. Research Findings/Insights: Using a sample of 2,341 Chinese firms for the years 2001 to 2013, we document that the contestability of multiple non-controlling large shareholders relative to controlling shareholders reduces the adoption of excess leverage policies, tunneling and enhances capital investment. Another intriguing finding is that the government as a controlling shareholder exerts significant influence and reduces the monitoring effectiveness of multiple larger shareholders. Theoretical/Academic Implications: By addressing the role of multiple large shareholders on excess leverage decisions, this study makes an important contribution to the corporate governance literature. We extend the recent developments in agency theory regarding the role of multiple large shareholders in constraining expropriation of controlling shareholders with excess control rights and their effect on firm leverage decisions. Our results support the theoretical models which indicate that the presence of multiple large shareholders is an important and efficient internal governance mechanism that mitigates a firm’s agency costs, particularly, in an emerging market environment where corporate governance is weak and inadequate to curb tunneling problem. JEL classification: G15; G34; G3

The impact of split share structure reform on corporate governance in China : an empirical analysis of ownership structure and firm performance of listed companies

Magister Economicae - MEconChina has embarked on a wide range of economic reforms in the past thirty years. One of the major reforms was to restructure state-owned enterprises (SOEs) into public listed companies (PLCs) to improve the performance and quality of corporate governance of SOEs. However, the unique phenomenon of China’s equity market is that the state continues to hold a controlling stake in PLCs with less than 40% of shares tradable in the stock market. This seriously affects the performance and quality of corporate governance of China’s PLCs. This mini-thesis investigates the effects of split-share structure reform on SOEs in China, with particular focus on an analysis of the relationship between ownership structure and firm performance of listed companies. By using a sample of the top 50 companies based on the ranking of the 2004 Fortune top 100 PLCs, a negative correlation was found between the state ownership structure and firm performance of China PLCs before the announcement of split-share structure reform. However, by using the same samples and techniques, the analysis shows that the improvement in the diversified ownership structure had a positive impact on firm performance in China PLCs after the reform

Executive Compensation and Corporate Governance in China

We investigate executive compensation and corporate governance in China’s publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors

Ownership structure, board characteristics, and tax aggressiveness

Tax aggressiveness, as commonly proxied by the effective tax rate (ETR), measures a firm’s effort spent on minimizing its tax payments. It is suggested that more tax aggressive firms have greater incentives to allocate resources to minimize taxes and thus have lower ETRs. Corporate governance has been continuously receiving attention in literature across different fields and can affect a firm’s tax strategy through its control mechanism. This thesis investigates how corporate governance influences a firm’s tax aggressiveness. The main hypothesis of this thesis is whether firms with good corporate governance will have less incentives and opportunities to manage tax aggressively. Specifically, I take advantages of the distinct institutional settings in China to study whether the Chinese firm’s tax aggressiveness is affected by ownership structure and the characteristics of board of directors. Using all non-financial listed companies in the Chinese A-share market during 2003 and 2009 period, I find that firms with state-controlled nature and lower proportion of controlling shares pursue less aggressive tax strategies and maintain higher ETRs. In addition, my finding is consistent with prior literature that a higher percentage of the boards’ shareholdings and dual service duties performed by the board chairman result in lower ETRs. However, I do not find a significant relationship between the percentage of independent directors and tax aggressiveness which may suggest the ineffective role of independent directors in China

Executive Compensation and CEO Equity Incentives in China’s Listed Firms (CRI 2009-006)

This study investigates the economic, ownership and governance determinants of executive compensation and CEO equity incentives in China’s listed firms. Consistent with the agency theory, we find that executive compensation is positively correlated with firm size, performance, and growth opportunities. CEO incentives are negatively associated with firm size, positively linked with firm performance and growth opportunity. Firm risk has a negative effect on pay and incentives. Compensation and CEO incentives are significantly greater in privately-controlled firms compared to state-run firms and are lower in firms with concentrated ownership structures. Boardroom governance is important: firms with compensation committees or a greater fraction of independent directors on the board have higher executive pay and greater CEO equity incentives

Executive Compensation and the Split Share Structure Reform in China

AcceptedArticle"This is an Accepted Manuscript of an article published by Taylor & Francis in European Journal of Finance on 08 Jul 2013, available online: http://wwww.tandfonline.com/10.1080/1351847X.2013.802250."The split share structure reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more strongly related to share price movements. We predict that this reform will create remuneration arrangements that strengthen the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing that there is such an effect among state-controlled firms, and especially those where the dominant shareholders have a greater incentive to improve share return performance. Our results indicate that this reform strengthens the accountability of executives to external monitoring by the stock market, and therefore benefits minority shareholders in China

LEVERAGE AND DEBT MATURITY OF CHINESE LISTED FIRMS: DETERMINANTS AND EFFECTS ON CORPORATE PERFORMANCE

This thesis examines the determinants and effects of leverage and debt maturity on corporate performance from corporate governance perspective, making use of a large panel of Chinese listed firms over the period 2003-2010. In order to control for unobserved heterogeneity and the potential endogeneity of regressors, we use the system Generalized Method of Moments (GMM) estimator in our studies. We examine the following three main themes. First, we examine the impact of managerial ownership and other corporate governance variables on firms’ leverage. We document that the ownership structure plays a significant role in determining leverage ratios. More specially, controlling for traditional determinants of leverage, unobserved heterogeneity, endogeneity, and persistency in capital structure decisions, we report that managerial ownership has a positive and significant impact on firms’ leverage. Second empirical chapter is debt maturity and the effects of growth opportunities and liquidity risk on leverage. No single study has focused on this issue in the context of emerging markets. We find that the proportion of short-term debt attenuates the negative effect of growth opportunities on leverage in emerging markets, particularly in China. Additionally, we also report that the proportion of short-term debt negatively affects leverage as predicted by the liquidity risk hypothesis. When we distinguish between state owned firms and private controlled firms, we also find evidence that these effects are only relevant to private controlled firms. Third, we examine the impact of capital structure on corporate performance. The agency theory suggests that leverage affects agency costs and thereby influences firm performance. We find clear evidence of a positive relationship between leverage and the proportion of long term debt on firms’ performance, as measured by ROA, ROS or productivity. Yet, when distinguishing between state and privately controlled firms, we find that leverage and proportion of long-term debt only affects the performance of private firms. Our research has significant policy implications for managers, owners, potential investors and the government. First, it suggests that the Chinese government’s recent policies aimed at reforming ownership structure and encouraging managerial ownership in listed firms have been successful in providing managers with incentive to adopt risky financial choices. Further, our study extend Diamond’s liquidity risk hypothesis by showing that institutional factors (e.g. government ownership) have significant influence on the liquidity risk faced by firms when they use more short-term debt in their capital structure. Finally, our research suggests that long term debt is more effective in improving performance of listed private firms in China. Our study recommends that while managerial ownership should be further encouraged in the state-controlled sector which helps to overcome weak managerial incentive problem faced by them, the government ownership which weakens incentive mechanisms for managers in them should be further reduced so as to enable these firms to make appropriate financial choices. The board of directors, especially independent directors do not seem to influence firms’ important decisions such as capital structure choices. Thus, our study recommends that a strong and truly independent board structure should be encouraged in the Chinese listed corporations in order to improve effectiveness of their corporate governance. Further, lenders such as banks may extend more long term credit to private sector which helps to improve performance of these firms

CORPORATE GOVERNANCE AND CORPORATE FINANCE: EVIDENCE FROM CHINESE LISTED COMPANIES

This thesis explores the linkages between corporate governance and corporate finance, making use of a large panel of Chinese listed firms over the period 2003-2010. We investigate three main themes. First, we examine the impact of managerial ownership and other corporate governance variables on firms’ exporting decisions, which are characterized by considerable risk and information asymmetries. We document that both export propensity and intensity increase with managerial ownership up to a point of around 23%-27%, and decrease thereafter. We also find a negative association between state ownership and export intensity. Furthermore, we observe that the larger the board size, the lower the firm’s export propensity and intensity, and that firms with a higher proportion of independent directors in the board are generally less likely to export. These findings are driven by privately controlled firms during the post-2006 split share structure reform period. Second, we examine the relationship between managerial ownership and corporate investment decisions. We find that investment decisions are systematically related to managerial ownership in two ways. Firstly, managerial ownership exerts a positive direct effect on corporate investment decisions, by aligning management’s incentives with the interests of shareholders. Secondly, we document that, by acting as a form of collateral to lenders, managerial ownership helps to reduce the degree of financial constraints faced by firms. Third, we examine the impact of ownership and corporate governance on agency costs. We measure the latter in two ways: using the sales to assets ratio, and the general administration and selling expenses scaled by assets. We find that, especially in the post-2006 split share structure reform period, increased managerial ownership and debt financing work as effective corporate governance mechanisms, by mitigating agency problems. We also find evidence that while legal person shareholding helps to mitigate agency costs for privately controlled firms in the post-reform period, large boards of directors are associated with higher agency costs in government controlled firms. From a policy perspective, our findings suggest that the Chinese government’s recent policies aimed at reforming ownership structure and encouraging managerial ownership in listed firms have helped to reduce agency and asymmetric information problems, thereby enabling firms to enhance investment efficiency and international activities. Our study recommends that greater attention should therefore be paid to compensation contracts of the management team and to board characteristics, and that state ownership should be further reduced. This would help further enhance resource allocation efficiency and sustain high levels of economic growth