nach oben

Journal of Management and Governance

Erschienen in:

01.02.2014

The double-edged sword of CEO/chairperson duality in corporatized state-owned firms: evidence from top management turnover in China

verfasst von: Michael Firth, Sonia M L Wong, Yong Yang

Erschienen in: Journal of Management and Governance | Ausgabe 1/2014

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

This study examines how board leadership structure (CEO duality) affects the corporate governance of corporatized state-owned firms where the state shareholders use these firms to serve both profit and non-profit objectives. We propose that CEO duality will generate a positive (negative) significant impact on the firms’ corporate governance when state owners tend to monitor their CEOs on the basis of profit (non-profit) considerations. We test our hypotheses by examining the relations between CEO duality and CEO turnover in Chinese listed companies that are ultimately controlled by central or local governments. We find that CEO duality is negatively related to turnover in marginal profit-making firms where turnover would be value-enhancing. This suggests that CEO duality is detrimental to these firms’ corporate governance because it entrenches relatively poorly performing CEOs. Duality is also negatively related to turnover in high-profitability firms where turnover would be non-value-enhancing. This suggests that CEO duality might positively contribute to the corporate governance of these firms by reducing the occurrence of non-value enhancing turnover. Overall, our study suggests that CEO duality is a double-edged sword in corporatized state-owned firms.

Vorheriger Artikel CEO and Chairperson characteristics and firm performance

Nächster Artikel Managerial incentive, organizational slack, and performance: empirical analysis of Japanese firms’ behavior

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

Based on a sample of 630 privatization offers from 59 countries, Jones et al. (1999) find that the average amount of capital sold in these offers is only 36.8 %, with less than 8 % of the companies selling 100 % of their capital. Gupta (2005) reports that the Indian government sold only 16 % of its equity in state firms in its privatization program. Anderson et al. (2000) find that 41 % of privatized listed companies in Mongolia have some state ownership.

We use financial performance (hereafter, performance) to denote maximizing corporate value and-or profitability and net income. Unfortunately, we do not have access to data on non-financial performance and thus cannot directly measure non-financial performance. We take the absence of a significant effect of financial performance as an indication of the presence of non-financial objectives.

In their studies of the effects of privatization in both developed and developing countries, D'Souza and Megginson (1999) and Megginson et al. (1994) document lower post-privatization improvements in corporate performance when government retains a higher percentage of shares in the privatized companies. Based on a sample of listed Chinese companies where the majority of the companies are corporatized SOEs, Sun and Tong (2003) offer evidence that shareholdings by government agencies have negative effects on firm performance but shareholdings by state-owned commercial firms have positive effects on firm performance. However, in another China study, Wei et al. (2005) find that the shareholdings of both government agencies and state-owned commercial firms in China are negatively related to firm performance.

We note, however, that there are a few dissenting studies. For example, Hewa-Wellalage and Locke (2011) conclude that duality helps improve firm performance and reduce agency costs in their study of multinational subsidiaries in Sri Lanka. Byrd et al. (2012) find that thrift institutions in the U.S. during the 1980s were less likely to fail if they had a dual CEO/Chairperson position. Note these studies did not explicitly examine state owned firms.

There are two types of state-owned shares. State shares are created as the consequence of a government agency contributing its assets to the formation of a shareholding company. The ultimate owner is the State Council, but these shares are managed by the bureaus of the Ministry of Finance and the State Asset Management Administration. Legal person shares, on the other hand, represent contributions by government-invested SOEs of their legally owned assets to the formation of a shareholding company.

The de-listing system, which is called the special treatment (ST) system, was introduced by the China Securities and Regulatory Commission (CSRC) in 1998. Under the ST system, a listed firm is labeled as ST if it has experienced financial losses for two consecutive fiscal years or is technically insolvent. If a listed firm cannot return to profit-making status within 2 years after being labeled as a ST, it will be further labeled as a particular transfer (PT) firm and this means its shares can only be traded on Friday and may even face de-listing.

Zhang (1998) also suggests that the state shareholders in China too often base their selection of CEOs on personal connections (guanxi) rather than merit because they want to appoint a friendly CEO to facilitate their tunneling of company resources.

Our study is different from the study of Pi and Lowe (2011) in two ways. First, we examine whether CEO turnover in firms with different levels of profitability are different in nature whereas Pi and Lowe assume all turnovers are meant to be value-enhancing. Second, we examine whether CEO duality will have different impacts on the turnover rate in firms with different levels of profitability whereas Pi and Lowe (2011) assume identical impacts for all firms.

The data on the ownership identity of China’s listed companies come from the ultimate ownership dataset provided by Sinofin.

Consistent results can be obtained if we exclude only the top and bottom 0.5 % of the observations.

Consistent with the government’s strategy to use the stock market as the fund-raising venue for SOEs, approximately 85.1 % of listed firm-year observations in the period 1995 to 2003 are state controlled.

The stated reasons include (1) change of job, (2) contract expiration, (3) change of controlling shareholders, (4) retirement, (5) health, (6) resignation, (7) dismissal, (8) corporate governance reform, (9) completion of acting duties, (10) personal reasons, (11) legal disputes, and (12) no reason given.

Turnover with the stated reason of corporate governance refers to two types of turnovers that are unique to China’s listed firms. The first type of turnover involves the division of the combined position of chairperson of the board of directors and CEO into two separate positions (i.e., the CEO resigns from her/his managerial position, but retains the chairperson position) with the stated objective of improving corporate governance. The second type of turnover refers to those that result from regulations imposed by the China Securities Regulatory Commission in 1999 that require CEOs who also hold senior managerial positions in the parent firms to retire from one of the positions to minimize the conflict of interest between the parent firms and the minority shareholders.

We search for the destination of departing CEOs by using five data sources: the annual reports of companies, Infobank’s China Economics News Database, Infobank’s China’s Listed Firms Database, China’s Listed Firms Database available at http://www.sina.com.cn, and Internet materials available at http://www.baidu.com.

The formal power associated with a position is a particularly important and relevant factor in determining the nature of turnover for CEOs in CSOEs. This is because CEOs in these firms are actually government officials rather than professional managers. For government officials, moving to a lower-ranking position with less formal power is a relatively clear indication of demotion, because the major components of reward to government officials is rank (power) but not monetary rewards. As a CEO may be appointed by his/her parent company to take up a lower-rank position in another subsidiary company for special purposes and on a short-term basis (such as restructuring a subsidiary in trouble), we treat a CEO taking a position in his/her firm’s parent company or other subsidiary as non-forced rather than forced.

This proportion is higher than the rates reported by Denis and Denis (1995) and Huson et al. (2004) for U.S. companies (13.3 and 18 % respectively) and Kang and Shivdasani (1995) for Japanese companies (24.14 %).

For a CEO with tenure less than 3 years, MROA is the average performance over the CEO’s tenure.

In addition to the whole sample, VIFs for each independent variable included in our out-performing, marginal-performing, and loss-making sub-samples do not exceed 5. The values of these VIFs are available from the authors on request.

For the first CEO of a listed company, there is no previous CEO and we use the duality status at the year of listing as a substitute for Fdua.

We also follow Murray (2006) to check the validity of our instrument by calculating the correlation between our instrument and the disturbance term. The coefficient is only −0.036. The low or nearly zero correlation further confirms that our IV is valid.

Our IV addresses only the endogeneity problem at a CEO level but not firm level, However, the endogeneity could be at a firm level. We address this concern by estimating our regressions by using fixed effect models. We also estimate our models using the Huber/White/sandwich robust estimates with adjustment for within-cluster correlation for each company.We obtain consistent results from these two approaches, which suggest that our results are unlikely to be driven by the endogeneity problem at a firm level.

Adams, R. B., Almeida, H., & Ferreira, D. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 18(4), 1403–1432.CrossRef

Anderson, J. H., Korsun, G., & Murrell, P. (2000). Which enterprises (believe they) have soft budgets? Evidence on the effects of ownership and decentralization in Mongolia. Journal of Comparative Economics, 28(2), 219–246.CrossRef

Armstrong, C. S., Bath, M. E., & Riedl, E. J. (2010). Market reaction to the adoption of IFRS in Europe. The Accounting Review, 85(1), 31–61.CrossRef

Bai, C. E., Lu, J. Y., & Tao, Z. G. (2009). How does privatization work in China? Journal of Comparative Economics, 37(3), 453–470.CrossRef

Barth, M. E., Landsman, W. R., & Lang, M. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467–498.CrossRef

Bozec, R., & Dia, M. (2007). Board structure and firm technical efficiency: Evidence from Canadian state-owned enterprises. European Journal of Operational Research, 177, 1734–1750.CrossRef

Brickley, J. A., & Van Horn, R. L. (2002). Managerial incentives in nonprofit organizations: Evidence from hospitals. Journal of Law and Economics, 95(1), 227–250.CrossRef

Byrd, J., Fraser, D. R., Lee, D. S., & Tartaroglu, S. (2012). Are two heads better than one? Evidence from the thrift crisis. Journal of Banking & Finance, 36(4), 957–967.CrossRef

Chang, E., & Wong, S. (2004). Political control and performance in China’s listed firms. Journal of Comparative Economics, 32(4), 617–636.CrossRef

Chang, E., & Wong, S. (2009). Governance with multiple objectives: Evidence from top executive turnover in China. Journal of Corporate Finance, 15(2), 230–244.CrossRef

Chen, G. M., Firth, M., & Rui, O. (2006). Have China’s enterprise reforms led to improved efficiency and profitability? Emerging Markets Review, 7(1), 82–109.CrossRef

Chen, G. M., Firth, M., Xin, Y., & Xu, L. P. (2008). Control transfers, privatization, and corporate performance: Efficiency gains in China’s listed companies. Journal of Financial and Quantitative Analysis, 43(1), 161–190.CrossRef

Claessens, S., & Djankov, S. (2002). Privatization benefits in Eastern Europe. Journal of Public Economics, 83(3), 307–324.CrossRef

Davidson, W. N. I. I. I., Ning, Y., Rakowski, D., & Elsaid, E. (2008). The antecedents of simultaneous appointments to CEO and Chair. Journal of Management and Governance, 12, 380–401.CrossRef

Delios, A., & Wu, Z. J. (2005). Legal person ownership, diversification strategy and firm profitability in China. Journal of Management and Governance, 9(2), 151–169.CrossRef

Denis, D. J., & Denis, D. K. (1995). Performance changes following top management dismissals. Journal of Finance, 50(4), 1029–1057.CrossRef

Denis, D. J., Denis, D. K., & Sarin, A. (1997). Ownership structure and top executive turnover. Journal of Financial Economics, 45(2), 193–221.CrossRef

D’Souza, J., & Megginson, W. L. (1999). The financial and operating performance of privatized firms during the 1990 s. Journal of Finance, 54(4), 1397–1438.CrossRef

Eldenburg, L., & Krishnan, R. (2003). Public versus private governance: A study of incentives and operational performance. Journal of Accounting and Economics, 35(3), 482–504.CrossRef

Elsayed, K. (2011). Board size and corporate performance: The missing role of board leadership structure. Journal of Management and Governance, 15, 415–446.CrossRef

Faleye, O. (2007). Does one hat fit all? The case of corporate leadership structure. Journal of Management and Governance, 11, 139–259.CrossRef

Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88, 288–307.CrossRef

Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–325.CrossRef

Finkelstein, S., & D’Aveni, R. A. (1994). CEO duality as a double-edged sword: How boards of directors balance entrenchment avoidance and unity of command. Academy of Management Journal, 37(5), 1079–1108.CrossRef

Firth, M., Chen, L., & Wong, S. (2008). Leverage and investment under a state-owned bank lending environment: Evidence from China. Journal of Corporate Finance, 14(5), 642–653.CrossRef

Firth, M., Fung, M. Y., & Rui, M. (2006). Firm performance, governance structure, and top management turnover in a transitional economy. Journal of Management Studies, 43(6), 1289–1330.CrossRef

Giovannini, R. (2010). Corporate governance, family ownership and performance. Journal of Management and Governance, 14(2), 145–166.CrossRef

Goyal, V. K., & Park, C. W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8(1), 49–66.CrossRef

Gupta, N. (2005). Partial privatization and firm performance. Journal of Finance, 60(2), 987–1015.CrossRef

He, X. J., Wong, T. J, & Young, D. Q. (2011). Challenges for the implementation of fair value accounting in emerging markets: Evidence from China. Contemporary Accounting Research, forthcoming.

Hewa-Wellalage, N., & Locke, S. (2011). Does CEO duality is really matter? Evidence from an emerging market. Corporate Ownership and Control, 8(4), 112–122.

Hua, J., Miesing, P., & Li, M. F. (2006). An empirical taxonomy of SOE governance in transitional China. Journal of Management and Governance, 10(4), 401–433.CrossRef

Huson, M. R., Malatesta, P. H., & Parrino, R. (2004). Managerial succession and firm performance. Journal of Financial Economics, 74(2), 237–275.CrossRef

Huson, M. R., Parrino, R., & Starks, L. (2001). Internal monitoring mechanisms and CEO turnover: A long-term perspective. Journal of Finance, 56(6), 2265–2297.CrossRef

Jaccard, J. (2001). Interaction effects in logistic regression. Sage University Papers Series on Quantitative Applications in the Social Sciences, Thousand Oaks, CA:Sage.

Jensen, M. (2001). Value maximization, stakeholder theory, and the corporate objective function. European Financial Management Review, 7(3), 297–317.CrossRef

Jones, S. L., Megginson, W. L., Nash, R. C., & Netter, J. M. (1999). Share issue privatizations as financial means to political and economic ends. Journal of Financial Economics, 53(2), 217–253.CrossRef

Kang, J., & Shivdasani, A. (1995). Firm performance, corporate governance and top executive turnover in Japan. Journal of Financial Economics, 38, 29–58.CrossRef

Kato, T., & Long, C. (2006). CEO turnover, firm performance and enterprise reform in China: Evidence from micro data. Journal of Comparative Economics, 34(4), 796–817.CrossRef

Larcker, D. F., & Rusticus, T. O. (2007). Endogeneity and empirical accounting research. European Accounting Review, 16(1), 207–215.CrossRef

Le, T. V., & Buck, T. (2011). State ownership and listed firm performance: A universally negative governance relationship? Journal of Management and Governance, 15(2), 227–248.CrossRef

Matsumura, T. (1998). Partial privatization in mixed duopoly. Journal of Public Economics, 70(3), 473–483.CrossRef

McNeil, C., Niehaus, G., & Powers, E. (2004). Management turnover in subsidiaries of conglomerate versus stand-alone firms. Journal of Financial Economics, 72(1), 63–96.CrossRef

Megginson, W., & Nettter, J. M. (2001). From state to market: A survey of empirical studies on privatization. Journal of Economic, 39, 321–389. (Literature).

Megginson, W. L., Nash, R. C., & Van Randenborgh, M. (1994). The financial and operating performance of newly privatized firms: An international empirical analysis. Journal of Finance, 49(2), 403–452.CrossRef

Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58(1–2), 215–260.CrossRef

Murray, M. P. (2006). Avoiding invalid instruments and coping with weak instruments. Journal of Economic Perspectives, 20(4), 111–132.CrossRef

Opper, S., Wong, M. L. S., & Hu, R. (2002). Party power, market and private power: CCP persistence in China′s listed companies. Research in Social Stratification and Mobility, 19, 103–136.CrossRef

Peng, S., & Bewley, K. (2010). Adaptability to fair value accounting in an emerging economy: A case study of China’s IFRS convergence”. Accounting, Auditing & Accountability Journal, 23(8), 982–1011.CrossRef

Peng, M. W., Li, Y., Xie, E., & Su, Z. (2010). CEO duality, organizational slack and firm performance in China. Asia Pacific Journal of Management, 27, 611–624.CrossRef

Peng, M. W., Zhang, S. J., & Li, X. C. (2007). CEO duality and firm performance during China’s institutional transitions. Management and Organization Review, 3(2), 205–225.CrossRef

Pi, L., & Lowe, J. (2011). Can a powerful CEO avoid involuntary replacement? An empirical study from China. Asia Pacific Journal of Management, 28, 775–805.CrossRef

Pistor, K., & Xu, C. (2005). Governing stock markets in transition economies: Lessons from China. American Law and Economic Review, 7(1), 184–210.CrossRef

Powers, E. A. (2005). Interpreting logit regressions with interaction terms: An application to the management turnover literature. Journal of Corporate Finance, 11(3), 504–522.CrossRef

Qian, Y., & Roland, G. (1998). Federalism and the soft budget constraint. American Economic Review, 88(5), 1143–1162.

Roosenboom, P. (2005). Bargaining on board structure at the initial public offering. Journal of Management and Governance, 9(2), 171–198.CrossRef

Rusticus, T. O., & Larcker, D. F. (2010). On the use of instrumental variables in accounting research. Journal of Accounting and Economics, 49(3), 186–205.CrossRef

Santos, F. M., & Eisenhardt, K. M. (2005). Organizational boundaries and theories of organization. Organization Science, 16(5), 491–508.CrossRef

Shen, W., & Cannella, A. A, Jr. (2002). Power dynamics within top management and their impacts on CEO dismissal followed by inside succession. Academy of Management Journal, 45(6), 1195–1206.CrossRef

Shleifer, A. (1998). State versus private ownership. Journal of Economic Perspectives, 12, 133–150.

Shleifer, A., & Vishny, R. W. (1994). Politicians and firms. Quarterly Journal of Economics., 109(4), 995–1025.CrossRef

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783.CrossRef

Sun, Q., & Tong, W. H. S. (2003). China share issue privatization: The extent of its success. Journal of Financial Economics, 70(2), 183–222.CrossRef

Tian, J. J., & Lau, C. (2001). Board composition, leadership structure and performance in Chinese shareholding companies. Asia Pacific Journal of Management, 18, 245–263.CrossRef

Tricker, R. I. (2012). Corporate governance (2nd ed.). Oxford: Oxford University Press.

Volpin, P. (2002). Governance with poor investment protection: Evidence from top executive turnover in Italy. Journal of Financial Economics, 64(1), 61–90.CrossRef

Wei, Z., Xie, F., & Zhang, S. (2005). Ownership structure and firm value in China’s privatized firms: 1991–2001. Journal of Financial and Quantitative Analysis, 40(1), 87–108.CrossRef

Wong, M. L. S. (2006). China’s stock market: A marriage of capitalism and socialism. Cato Journal, 26(3), 1–35.

Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, Mass: The MIT Press.

Xu, Z., & Birch, M. (1999). The economic performance of state-owned enterprises in Argentina: An empirical assessment. Review of Industrial Organization, 14(4), 355–375.CrossRef

Zhang, W. Y. (1998). China’s SOEs reform: A corporate governance perspective. Working paper of the Institute of Business Research, Beijing University.

Titel: The double-edged sword of CEO/chairperson duality in corporatized state-owned firms: evidence from top management turnover in China
verfasst von: Michael Firth
Sonia M L Wong
Yong Yang
Publikationsdatum: 01.02.2014
Verlag: Springer US
Erschienen in: Journal of Management and Governance / Ausgabe 1/2014
Print ISSN: 1385-3457
Elektronische ISSN: 1572-963X
DOI: https://doi.org/10.1007/s10997-012-9225-6

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2014

Managerial incentive, organizational slack, and performance: empirical analysis of Japanese firms’ behavior

Boards in microfinance institutions: how do stakeholders matter?

Economic reforms, corporate governance and privatization method as determinants in performance changes of new privatized firms: the case of MENA countries

CEO and Chairperson characteristics and firm performance

Public–private versus public ownership and economic performance: evidence from Italian local utilities

Ownership concentration and market value of European banks