Relocation%20Communication

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Governance with Multiple Objectives Evidence from
Top Executive Turnover in China By Eric C.
Chang And Sonia Wong
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1. Introduction

• Purpose of this Study
• Examine the relations between CEO turnover and
  firm performance in Chinas listed firms.
• Motivations
• The turnover-performance relation serves as an
  indicator of the effectiveness of corporate
  control over managers.
• With Chinas accession to the WTO and its
  expansion of capital market, the motivations and
  incentives of shareholders of listed companies to
  exercise effective corporate control should be of
  great interest to policy makers and global
  investors.

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1. Introduction

• Past Studies on Turnover-Performance Issues
• Financial performances and the likelihood of
  turnovers
• Jensen and Warner(1988) Top management turnover
  is inversely related to stock price performance.
• Huson, et al.(2001) The nature of CEO turnover
  has changed over time, but the relation between
  the likelihood of forced CEO turnover and firm
  performance did not changed significantly.
• Kaplan(1994) Consistent with US evidence,
  fortunes of Japanese top executives are
  positively correlated with stock performance and
  cash flows.

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1. Introduction

• Past Studies on Turnover-Performance Issues
• Comparisons of performances prior to and after
  turnovers
• David J. Denis Diane K. Denis (1995) Forced
  resignations of top managers are preceded by
  significant performance declines and followed by
  large performance improvements.
• Parrino(2003) Aggregate institutional ownership
  declines in the year prior to forced CEO
  turnover.
• Huson, et al.(2004)Turnover announcements are
  associated with positive abnormal stock returns,
  which are in turn significantly positively
  related to subsequent performance.

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1. Introduction

• Private Shareholders vs. State Shareholders
• Past studies focus on firms controlled by private
  shareholders
• This paper examine Chinas listed firms
  controlled by state-owned shareholders
• Specialties of State Shareholders
• not real owners but bureaucrats
• tend to use state-owned firms to serve multiple
  social and political objectives
• are plagued by agency problems
• may have incentives different from those of
  private shareholders in maximizing profit and
  disciplining managers

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1. Introduction

• Objectives Integration
• Jensen(2001) It is impossible to maximize more
  than one objective when tradeoffs exist.
• State shareholders need to assign weights to
  various objectives and integrate them.
• Expectations on Firms with Multiple Objectives
• Current firm performance affects performance
  weight.
• Current firm performance affects discipline
  incentive.
• Relative importance of performance in objective
  functions affects post-turnover performance
  changes.

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1. Introduction

• An Overview of Results
• There is a significant negative relation between
  pre-turnover profitability level and CEO turnover
  in loss-making firms, but not in profit-making
  firms.
• Post-turnover profitability improves
  significantly in loss-making firms, but not in
  profit-making firms.
• Implication of the Results
• Turnover-performance relations are different in
  loss-making firms and in profit-making firms.
• State shareholders decide their incentives to
  discipline CEOs according to firms performance.
• Objective functions are time-varying.

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1. Introduction

• Additional Contributions
• offers empirical evidence on the monitoring
  activities of state shareholders, based on a
  large sample of partially privatized public
  listed firms.
• provides evidence that shareholders rely more on
  average performance over a CEOs tenure rather
  than annul performance to evaluate their CEOs.
• shows that loss-making firms and profit-making
  firms have different extents of post-turnover
  performance improvements.

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2. Research Background

• Governance Structures in Chinas Listed Firms
• Nearly all listed firms in Chinas stock market
  are spin-offs of large state-owned enterprises
  (SOEs).
• State asset management agencies and parent SOEs
  retain dominant control and act as state
  shareholders.
• Although listed firms have formal modern
  governance structures, local governments maintain
  control in them.
• CEO turnovers are controlled by governments
  through their personnel appointing authority.
• State shareholders incentive structures
  influence CEO turnovers in Chinas listed firms.

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2. Research Background

• State Shareholders Behaviors Under Different
  Incentive Views
• Stewardship View
• State shareholders direct listed firms to promote
  the governments social and political goals, and
  therefore has weak profit-maximizing incentives.
• Loss-making firms would put higher weight on
  performance to avoid eroding resources available
  for the governments social and political plans.
• Stewardship view implies that state shareholders
  of loss-making firms would have a higher
  incentive to discipline managers on the basis of
  performance.

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2. Research Background

• Self-dealing View
• State shareholders use state-owned firm resources
  to promote their own interests, and therefore
  also has weak profit-maximizing incentives.
• State shareholders of loss-making firms may place
  a higher weight on firm performance to increase
  resources available for their self-serving
  purposes.
• Self-dealing view implies that shareholders of
  loss-making firms have higher incentive to
  discipline CEOs on the basis of firm performance
  than shareholders of profit-making firms.

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2. Research Background

• Bureaucrat View
• State shareholders concern themselves ultimately
  on their job security and prospects.
• Bureaucratic decisions tend to be slow and
  pressure-driven to maintain prudence, conformity
  and consensus-building. (Merton,1940
  Fligstein,1987)
• Being a lagging and comprehensive indicator of a
  CEOs performance, average performance is more in
  line with state shareholders desire for prudence
  and conformity.
• Bureaucrat view implies that shareholders of
  loss-making firms rely more on average rather
  than annual performance to evaluate their CEOs.

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2. Research Background

• Determinants of Performance Changes Following
  Turnover
• State shareholders profit-maximizing incentives
  would affect post-turnover performance changes.
• Turnovers of loss-making firms are more likely to
  be followed by large improvements, as
  shareholders have higher incentives to discipline
  their managers on firm performance basis.
• The story is on the opposite side for
  profit-making firms, as shareholders of such
  firms enjoy greater latitude to serve social and
  personal goals.

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3. Data, Sample Selection, and Research Method

• Data Sources
• Based on all firms listed by the Shanghai and
  Shenzhen Stock Exchanges from 1995 to 2000.
• Obtain data on CEO turnovers from CCGRD.
• Stated reasons for these turnovers are provided
  by CCGRD and can be classified into 11
  categories.

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3. Data, Sample Selection, and Research Method
Table 1 Annual CEO Turnover Rate and Performance
in China's Listed Firms 1995-2000
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3. Data, Sample Selection, and Research Method
Table 2 Stated Reasons for CEO Turnover in
Chinas Listed Enterprises
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3. Data, Sample Selection, and Research Method

• Sample Selection Forced vs. Non-Forced Turnovers
• Distinguish forced turnovers from non-forced
  ones
• exclude turnovers where the stated reasons were
  retirement, health, corporate governance reform,
  change of controlling shareholders, and legal
  disputes
• for the remaining turnovers, trace the
  destinations of the departing managers and
  exclude cases where the departing managers took
  better positions after the turnover
• further exclude cases where the managers tenure
  was less than 1 year
• add 2 cases where the stated reason is retirement
  but the age of the departing mangers is less than
  55
• end up with 287 cases, representing 28.6 of all
  turnovers.

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3. Data, Sample Selection, and Research Method

• Sample Selection Nature of the Firm
• Base of a total of 4246 firm-year observations,
  we
• exclude 122 observations involving firms in the
  finance industry or listed only by the B-share
  market
• exclude 284 observations where the firms have
  private shareholders as the ultimate controlling
  shareholders
• exclude 151 observations involving firms with
  negative equity
• exclude 163 observations involving turnovers
  where CEOs tenure in the turnover year is less
  than 1 year
• exclude 416 observations with missing values
• end up with 3106 observations in the final sample.

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3. Data, Sample Selection, and Research Method

• Research Method
• Adopt four performance measures
• ROA
• IROA (industry-adjusted ROA)
• MROA (moving average of ROA)
• MIROA (moving average of IROA)
• Set up four logit models to estimate
  turnover-performance links, each model with one
  performance measure

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4. Regression Results

• Determinants of Turnovers (Table 7)
• Turnover probability and control variables
• coefficients of Age are significantly positive
• coefficients of Tenure and Duality are
  significantly negative
• Turnover probability and performance measures
• negative related to all four performance measures
• turnover rates are more sensitive to average
  performance than to annual performance
• models using average performance have higher
  explanatory powers

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4. Regression Results
Table 8. Logit Regression Estimation of
Turnover-Performance Links in Chinas
Profit-making Firms (Selected Part)
Table 9. Logit Regression Estimation of
Turnover-Performance Links in Chinas Loss-making
Firms (Selected Part)
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4. Regression Results

• Turnover Sensitivities to Firm Performance (Table
  8 and 9)
• Profit-making firms
• all performance measures are statistically
  insignificant
• coefficients of Duality and Tenure are
  significantly negative
• Loss-making firms
• all performance measures are significant, at
  different levels
• coefficients of Duality and Tenure are
  insignificant
• Conclusions
• consistent with stewardship and self-dealing
  views
• CEOs power is able to reduce the probability of
  turnovers in profit-making firms, but not in
  loss-making firms

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4. Regression Results
Table 11 (Panel A B) Changes in Post-turnover
Performance in Chinas Listed Firms
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4. Regression Results
Table 11 (Panel C D) Changes in Post-turnover
Performance in Chinas Listed Firms
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4. Regression Results

• Performance Changes Surrounding Turnover (Table
  11)
• Use either the turnover year (year 0) or the
  preceding year (year -1) as the base year and
  trace performances from year 1 to 3
• Findings
• Changes in ROA and IROA
• declined in profit-making firms, more significant
  in ROA
• significantly improved in loss-making firms,
  especially in IROA
• Median changes in CROA and ICROA
• no significant changes in profit-making firms
• significantly improved in loss-making firms,
  except in year 2
• Conclusions significant post-turnover
  improvements occur in loss-making firms, not in
  profit-making firms

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5. Concluding Remarks

• This study examines turnover-performance
  relations in Chinas listed firms where
  shareholders have multiple objectives.
• We provide evidence on
• the existence of different turnover-performance
  sensitivities in profit-making and loss-making
  firms
• the existence of different post-turnover
  performance in profit-making and loss-making
  firms
• Our study suggests that when firms are
  experiencing losses, state shareholders tend to
  attach a higher weight to firm performance and
  have higher incentive to discipline managers.
• Generalization of our results to private
  shareholders should be taken with caution.

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Table 8
Table 8. Logit Regression Estimation of
Turnover-Performance Links in Chinas
Profit-making Firms
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Table 9
Table 9. Logit Regression Estimation of
Turnover-Performance Links in Chinas Loss-making
Firms