Download Top Management Turnover, Firm Performance and Government

Top Management Turnover, Firm Performance and Government Control:
Evidence from China’s Listed State-Owned Enterprises *
Fang Hu
Department of Accountancy, College of Business,
City University of Hong Kong
Email: [email protected]
Sidney C. M. Leung
Department of Accountancy, College of Business,
City University of Hong Kong
Email: [email protected]
May 2010
*
We appreciate comments from Kelvin Lam, Grant Richardson, Bikki Jaggi, Tianyu Zhang,
participants of the 2009 American Accounting Association annual meeting and seminar
participants at the Seoul National University.
Abstract
Using a sample of 916 Chinese listed state-owned enterprises (SOEs) from 2001 to
2005, we find that the likelihood of top management turnover is negatively associated
with firm performance, suggesting the existence of an effective corporate governance
mechanism in an emerging economy that is highly controlled by government. We also
find that the negative turnover-performance relationship is stronger when the SOE is
held by the Central Government, is directly held by a local government, or holds a
monopolistic position in a local economy or in a strategic/regulated industry. The
results indicate that the market-based corporate governance mechanism that punishes
top executives as a result of poor performance is not only used in Chinese SOEs, but is
used more frequently when the governance control of SOEs is more intensive. Our
findings support the notion that government control strengthens rather than weakens the
turnover-performance governance mechanism. Our additional analysis shows that this
complementary effect persists in regions that lack pro-market institutions such as
investor protections and a functioning capital market.
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1. Introduction
A large body of evidence from developed markets confirms the effectiveness of
corporate governance in spurring CEO turnover (Banker and Datar, 1989; Holmstrom
and Milgrom, 1991; Engel et al., 2003; Bushman et al., 2004; Weisbach, 1988; Murphy
and Zimmerman, 1993). However, the literature generally shows that there are doubts
over whether the corporate governance mechanisms that have been shown to be
effective in developed economies (market-based governance mechanisms) are equally
effective in emerging economy SOEs because the significant political influence that
government has over such firms could lead to the emergence of a ‘stakeholder’
governance model, which is characterized by a relation-based contract rather than a
market-based contract (Ball et al. 2000, 2003). It has been argued that SOEs have
multiple objectives including political objectives because they have to maintain close
relationships with their major stakeholders, such as governments, banks and financial
institutions, and labor unions, thus reducing the effectiveness of market-based corporate
governance mechanisms aligned with firm performance. However, some researchers
argue that effective market and governance mechanisms are an important ingredient in
the success of some emerging economies such as China (Chow, 2010).
This study examines the corporate governance of listed state-owned enterprises in
China, the world’s largest emerging economy, which is characterized by intensive state
and government control. We address two research questions. First, is the market-based
governance mechanism whereby top executives are punished for poor performance
effectively used in corporate businesses with intensive government control or influence?
Second, and more importantly, is the association between top management turnover and
poor performance stronger or weaker when governance control of SOEs is more
intensive?
These two research questions are important given the opposite views on the effects
of government control of SOEs. On the one hand, doubts have been raised about the
effectiveness of market-based corporate governance in an emerging economy like
China that is highly controlled by government (e.g., Ball et al., 2000, 2003; Bushman
and Piotroski, 2006; Chan et al., 2001; Jaggi et al., 2000; Opper, 2007). Tam (1999,
2002) and Tenev and Zhang (2002) argue that top managers are unlikely to be fired and
replaced due to poor performance because of the involvement of state and party
bureaucrats in the appraisal process. On the other hand, government control may serve
as a remedy for a lack of pro-market institutions (Frye et al., 1997; Qian, 1996; Xu et
al., 2002). Some prior studies suggest that government control/ownership is not
necessarily less efficient than private ownership (Caves et al., 1980; Wortzel et al.,
1989; Martin et al., 1995; Kole et al., 1997). Indeed, government involvement or
regulation may offer a helping hand to ensure corporate business activity is efficiently
governed (Shleifer et al. 1997; La Porta et al., 2000; Qian, 1996; Chang et al, 2004).
Therefore, government control could either complement or substitute the market-based
top management turnover governance mechanism. Our findings should enrich the
understanding of whether government control and corporate governance mechanisms
are complementary or substitutive in Chinese SOEs and are likely to provide insights
into the role of government control in corporate governance in emerging economies.
China’s economy, the biggest among emerging markets, is one throughout which the
government has traditionally played an important role. State-owned enterprises (SOEs)
account for the majority of the economy. The majority of China’s listed firms are
controlled by state shareholders who retain their dominant control in the form of nontradable state-owned share (Sun et al., 2003). Among the top 500 firms in China in
2007, 349 (about 70%) were SOEs. While China has embarked on a series of reforms
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since the 1980s that have included privatization, corporatization, and the
implementation of an incentive contract system for SOEs managers, the government
retains dominant control through its ownership of non-tradable state-owned shares or
through its administrative authority over important SOE decisions. 1 Decisions to
appoint or remove key SOE personnel such as the chairman of the board or the CEO
are still in the hands of state controlling shareholders (Wong et al., 2004).
China’s SOEs provide a setting that is particularly conducive to testing the role of
government control on corporate governance because the SOEs are mainly controlled at
the jurisdictional levels and there is considerable variation in the degree of political
control and the extent of regulation across the jurisdictional regions. The large number
of SOEs and the variety in market institutions across regions allow us to perform a
meaningful analysis in a single country. Moreover, focusing on a single country under
the control of a unitary party enables us to capture the direct effects of government
control on corporate governance.
Using a sample of 4,906 firm-year observations from 916 Chinese SOEs listed on
the Shanghai and Shenzhen securities markets from 2001 to 2005, we find that CEOs or
chairmen are more likely to be fired in firms with poor accounting performance, a
result which suggests that the market-based corporate governance mechanism is
employed in SOEs that are typically subject to government control. To test the
intertwining effect of government control on the turnover-performance relationship, we
use several proxies to measure various aspects of government control: (i) the
concentration of government ownership, in which government control is measured
1
The Party and the government maintain ultimate and effective control over some aspects of decision making among
firms through a variety of authorization processes: the appointment and dismissal of top managers, the approval of
large investment projects, and vetoes of large asset disposals. One of the fundamental principles of Chinese
government control is known as “the Party controlling personnel”. The Party or government exercises ultimate
control over the selection and dismissal of personnel including the heads of most SOEs. Under the system of
political authorization, an appointment does not carry an explicit compensation package as it typically would in a
private firm financed through a capital market.
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through property rights; (ii) the jurisdictional level of government ownership, in which
government control is measured by administrative hierarchy; (iii) the monopolistic
position of an SOE, in which government control interests are measured because of
their importance to fiscal revenue and the political status of the local government; and
(iv) the strategic industry of an SOE, in which the importance of the industry to the
national economy and the extent to which it is subject to government control through
regulations are measured. We find that the negative relationship between top
management turnover and firm performance is significantly stronger among SOEs
subject to central or direct local government control, SOEs in a monopolistic position,
and SOEs in a strategic industry. However, we do not find that the relationship is
affected by concentrated government ownership. The overall results support the view
that the tighter the government control, the greater the degree of corporate control
exercised through the turnover-performance mechanism in China’s SOEs, suggesting
that these control mechanisms are complementary. Our additional analysis shows that
the complementary effect of government control on the turnover-performance
relationship strongly persists in firms from regions with poor investor protections and
less market liberalization. The results are consistent with the view that government
control can serve as a remedy for a lack of pro-market institutions as suggested by Xu
et al. (2002) and Frye et al. (1997).
This paper contributes to the existing literature in three ways. First, while most prior
research suggests that the corporate governance system in developed economies is
driven by the pressure of the external capital market, we show that the effectiveness of
one corporate control mechanism – management turnover decisions – could also be
driven by government control and government interests in enterprises in China, a
country which is similar to other emerging economies in its lack of full market
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competition and democratization. Some economists criticize government control over
corporations and argue that government control is detrimental to corporate operations
because the government is obsessed with multiple objectives that are muddied by
political views and government control precludes the existence of an individual owner
with strong incentives to monitor managers. As a result, government control will drive
the company away from value maximization (Alchian, 1965; Bai et al., 2005; Kornai,
1980; Shleifer et al., 1994, 1997). The alternative view is that government control or
regulation could act as a check-and-balance mechanism that ensures more efficient
corporate governance, particularly in a less-developed environment lacking pro-market
institutions (Shleifer et al. 1997; La Porta et al., 2000). Our results lend support to the
latter view that government control is beneficial rather than detrimental.
Second, despite criticism that the Chinese economy lacks a functioning capital
market and significant investor protection and is subject to extensive government
influence and control, China had been experiencing remarkably rapid economic growth
in the last two decades and is expected to continue on its high growth trajectory in the
next decade. Our findings provide a partial explanation for this intriguing phenomenon.
Although China’s economy lacks full market competition and pro-market institutions,
our results suggest that government control could serve both as a good check-andbalance mechanism that ensures more effective corporate decisions are made and as a
remedy for incomplete pro-market institutions.
Third, the findings provide a better understanding of the managerial labor market in
a transitional economy which is still subject to significant government control. It is
argued that the Chinese government selects officers and managers based on political
connections or other political considerations (the non-performance hypothesis of Opper
(2007)). Although political connections remain a focus of attention in China, evidence
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shows that observable performance measures are demanded as a control mechanism in
a transitional economy if the government aims to establish a rule-based governance
system (Chen et al., 2007; Li et al., 2004). We provide additional evidence on the
“performance hypothesis” of managerial labor in an emerging economy.
The remainder of the paper is organized as follows. Section 2 reviews the literature
and sets out the background to the study. Section 3 develops hypotheses and section 4
presents the research design. Section 5 describes the sample and data. Section 6 reports
the results. Section 7 performs robustness checks and section 8 concludes the paper.
2. Literature Review and Background
2.1 Management Turnover and Firm Performance in Prior Studies
Management turnover is an important aspect of a firm’s governance system. When
ownership and control are separated, one of the methods stakeholders use to monitor
and control management is to align the manager’s incentives with firm performance.
Thus, the relationship between management turnover and firm performance is a good
way of assessing the effectiveness of a firm’s governance system and has been widely
discussed in the literature (Banker and Datar, 1989; Holmstrom and Milgrom, 1991;
Engel et al., 2003; Bushman et al., 2004; Weisbach, 1988; Murphy and Zimmerman,
1993). Existing studies, which focus on privately held firms in developed market
economies, have reached two general conclusions. First, forced management turnover
is significantly negatively associated with firm accounting performance (Brickley, 2003;
Coughlan and Schmidt, 1985; EHW, 2003; Kaplan, 1994; Morck, Shleifer and Vishny,
1989; Weisbach, 1988). The inverse turnover-performance relationship represents an
efficient incentive mechanism in which managers are removed because of poor
performance. Second, the inverse relation between management turnover and
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accounting information on firm performance is induced by the pressure of the external
capital market. Because the external capital market demands a public, precise, and
observable measure of firm efficacy, accounting information is a useful measure in
turnover or compensation decision making (Banker and Datar, 1989; DeFond and Park,
1999; Holmstrom and Milgrom, 1991; EHW, 2003). Nevertheless, there is no clear
evidence on the effectiveness of firm governance systems in a developing market.
2.2 Government control and corporate governance in China’s SOEs
Two different roles of government control should be considered in analyzing the
objective functions of government owners in China’s SOEs. The first role of
government control is to act as the largest shareholder in the SOE. The incentive
problems that arise between shareholders and managers and are most commonly
discussed in the context of private firms also arise in the governance of SOEs. In spite
of their social and political goals, state shareholders have ownership interests in the
profitability of their companies (Frydman et al., 1996; Blanchard et al., 1996; Earle et
al., 1996; Hellman and Schankerman, 2000). The second role government control plays
is to allow the government to exert political or regulatory influence over the SOE.
Government officers or bureaucrats are appointed to supervise SOEs with objectives to
serve social and political interests such as correcting market failures and providing
additional employment opportunities and social security to the public (Shleifer et al.
1994, 1997). In addition, state ownership implies that bureaucrats exercise control on
behalf of the government. They are motivated by self-interest and will thus use stateowned company resources to promote their own personal interests (Shleifer et al. 1994,
1998; Jones, 1985; Krueger, 1990). As a result, the objective function of state owners is
at best a weighted average of company performance and the attainment of political
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goals that often detract from company performance.
Due to the complex incentives of government and individual bureaucrats, the
corporate governance structure of SOEs reflects a mixture of various controlling
methods and incentive issues in which government control through state shareholdings
may be employed as an explicit control device alongside other modern corporate
governance mechanisms. Most existing studies focus on the objectives of individual
politicians and neglect the incentive issues of controlling shareholders (Frydman et al.,
1996; Blanchard et al., 1996; Earle et al., 1996; Hellman et al., 2000; Kato et al., 2006).
Most theoretical arguments rely on the assumption that the government functions
purely as a political body or a regulator which has objectives other than profitability
and that these objectives encourage the government to intervene in business activities.
It is also important to take into account of state shareholders’ incentives in setting
control mechanisms in SOEs. Since the 1990s, the Chinese government has adopted a
modern corporate governance structure in an effort to transform Chinese SOEs into
modern corporations while preserving state ownership of these enterprises. One of the
modern corporate systems introduced to Chinese SOEs is a system of incentive
contracts designed to monitor SOE managers. Performance contracts have been
executed between managers and state owners (Shirley et al., 2001). Such performance
contracts include an undertaking from the top SOE manager to achieve a specified
earnings target within a given time period and specify government rewards for
achieving such goals and penalties for misconduct (Chang et al., 2009; Shirley et al.,
2001). In addition, the corporate governance structure of listed SOEs includes some
major sources of political control for the benefit of state shareholders (Chang et al.,
2004). One of these is the decision-making rights held by the government through
shareholdings and control rights. A second source of political control is the authority or
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regulatory scrutiny exerted by government administrators and line ministries to ensure
that their shareholding benefits are maximized by political checks and balances (Chang
et al., 2004; Qian, 1996).
3 Hypothesis Development
3.1 Top Management Turnover and Firm Performance in China’s SOEs
As discussed in the last section, Chinese SOEs are ultimately controlled by
government entities. Management turnover decisions and the criteria used for such
decisions are made by the state owner, which has objective functions as both a
shareholder and a political body.
The role of government control in the governance of SOEs is controversial. On the
one hand, economists generally argue that government control is detrimental to
corporate operations because the government is obsessed with multiple objectives (the
political agenda) or because there is no individual owner with strong incentives to
monitor SOE managers. Thus, government control will drive the company away from
value maximization and the government is unlikely to use market-based governance
mechanisms (Bai et al., 2005; Kornai, 1980; Shleifer et al., 1994, 1997). Consistent
with this view, Kato and Long (2006) find that relative to the listed private Chinese
firms, the negative relation between CEO turnover and firm performance is weaker
state-controlled firms. On the other hand, the government has strong incentives as the
owner of an SOE to adopt effective corporate control methods that allow it to monitor
managers on the basis of economic performance. The Chinese Central Government has
emphasized the economic performance of Chinese SOEs since embarking on its
economic reforms in the 1980s by promoting fiscal decentralization and yardstick
competition policies.
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The fiscal decentralization policy involves the decentralization of the revenue and
expense responsibilities of the Central Government to a lower level of government.
This policy allows local governments to tax local state enterprises and address social
issues (Oi, 1992; Montinola et al., 1995; Qian and Weingast, 1997). The yardstick
competition policy involves competition among jurisdictions as regions are compared
and evaluated by higher level government bodies in accordance with a set of
standardized performance criteria, one of which is the region’s economic performance
relative to its peers. The political status of the local government or a local governor’s
career in the Central Government is determined by the ranking of local economic
performance (Qian and Xu, 1993; Maskin et al., 2000). 2
Hence, state owners that act as major SOE shareholders have incentives to monitor
managers and maximize their wealth. Politicians also have incentives to encourage
better corporate earnings that promote regional economic performance and allow them
to discharge their fiscal responsibilities and stand out in the political competition for
career promotion. Anecdotal evidence shows that Chinese leaders of a province or
region are promoted to a higher rank as a result of economic success in the province or
region they govern. For example, Chen Demin was the Governor of Shanxi province
from 2004 to 2006 and was promoted to become the Deputy Director of the National
Development and Reform Committee in 2006 after the GDP growth rate ranking of
Shanxi rose from 18th in 2003 to number one in 2006. 3 In addition, poor firm
performance also limits the latitude and resources available to politicians to help them
serve their own personal objectives such as on-the-job consumption and the
accumulation of personal wealth, thus further increasing their incentives to dismiss
2
The Central Government rewards or punishes local officials on the basis of economic performance in their region,
which motivates them to promote the local economy (Blanchard and Shleifer, 2001).
3
Another example of the promotion of government officials based on provincial economic performance is Bo Xilai.
Bo Xilai was the governor of Liaoning province from 2001 to 2004 and was promoted to become the General irector
of China’s Department of Commerce in 2004 after the nationwide GDP growth rate ranking of Liaoning province
rose from 29th in 2001 to 14th in 2004.
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relatively poor performing managers (Chang et al., 2009). Based on the objective
function of the state owner and government officials, the following hypothesis is
proposed:
Hypothesis 1 (H1): The likelihood of top management turnover in Chinese SOEs is
negatively associated with firm performance.
3.2 Government Control and the Association between Top Management Turnover
and Firm Accounting Performance
Because the government plays both a political role and a shareholder’s role in statecontrolled business, government control could have both benefits and costs for the
corporate governance of SOEs. Strong government control could substitute or
complement the governance mechanism of top manager turnover based on poor
performance. We discuss these possible effects below.
The substitutive effect – Stronger government control could weaken the manager
turnover/performance governance mechanism for three reasons. First, as the
government has to pull back from its economic objectives to pursue its political or
social objectives, its primary selection criterion for SOE managers is not always
economic performance; political considerations are often more important factors.
Second, government control mainly relies on information obtained through
bureaucratic channels rather than on information provided by the capital market (such
as the stock market, rating companies, investment banks, or consulting companies).
Information on firm performance used to evaluate managers would be noisier with
greater government control. Third, bureaucrats from the Party/government departments
who exercise government control are not in a position and have no incentive to appoint
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the best candidates to top management positions because decisions on such
appointments are mainly politically motivated. Hence, tight government control is
likely to result in SOEs retreating from efficient corporate control mechanisms.
The complementary effect – On the other hand, strong government control could
strengthen the manager turnover/performance governance mechanism. Unlike in
developed economies where there is strong legal protection for investors, creditors have
priority of payments over shareholders, and managers and directors can be sued for
breach of fiduciary duty (Shleifer et al., 1997; La Porta et al., 2000), all of these
investor safeguards are weak in a developing economy like China because of defects in
the legal system and law enforcement. Managers are also subject to less pressure from
the external managerial labor market and face less legal risk for misconduct. Managers
thus have strong incentives to misappropriate state assets rather than achieving wealth
maximization for shareholders. Given managers’ self-interest incentives, the exercise of
tight government control by adhering to the practice of rewarding or penalizing top
managers according to firm performance serves as an important mechanism for
disciplining SOE managers and discouraging them from engaging in behavior that
reduces the amount of corporate resources over which the government or politicians
has (have) stronger interests (Brada, 1996, Tang et al., 1999).
Given China’s adoption of fiscal decentralization and yardstick competition policies,
we conjecture that in a country that lacks the full market competition and strong legal
system of developed countries, strong government control provides a helping hand to
Chinese SOEs (Shleifer et al. 1997; La Porta et al., 2000; Qian, 1996; Chang et al,
2004), partly through the adoption of an efficient corporate governance mechanism:
turnover in top managers based on poor performance. Recent studies on China’s
reforms show that government control in firms remains an influential factor in
13
corporate governance. For example, scholars have recognized the relative success of
some government-owned enterprises such as township/village enterprises over private
enterprises (Chang et al., 1994; Li, 1996; Che et al., 1998). Qian (2000) also argues that
privatization has been delayed in China, just as it has in Eastern European countries
such as Poland and Hungary, because maintaining government control has many
advantages (Qian, 2000). Hence, the second hypothesis is as follows:
Hypothesis 2 (H2): The negative association between top management turnover and
firm performance is stronger in SOEs with tight government
control.
4 Research Design
4.1 Measures
Top management turnover and firm performance
Top management turnover ( Turnover ) is an indicator variable equal to 1 if either
the Chairman or the Chief Executive Officer (CEO), or both, is (are) forced to leave the
firm (other than for natural reasons such as retirement, health, change of ownership, or
the end of a temporary appointment as disclosed in the CSMAR database), and 0
otherwise. Firm performance is measured by return on assets lagged one period
( ROAt −1 ), a proxy of previous firm performance (Engel, et al., 2003; Chang and Wong,
2006; Kato and Long, 2006; Weisbach, 1988).
Government control
Four metrics are used to measure the extent of government control or involvement
14
through property rights in or regulation of SOEs. They are described as follows:
i) The concentration of government ownership: because the attributes of ownership
determine government shareholder interests in firm performance and internal
managerial efforts (Boeker, 1992; Boeker et al., 1993; Denis et al., 1997; Salancik and
Pfeffer, 1980), the extent of government control through ownership is measured by its
concentration.
ii) The jurisdictional level of government ownership: central government and local
governments that govern the firm’s business directly are likely to have a greater ability
to intervene in the firm’s management than local governments that do not have direct
jurisdiction over the firm (Fan et al., 2007). Under China’s planning system, in which
blocks or regions are the foundation of the planning system (Maskin et al., 2000; Li et
al., 2004), government ownership is affiliated with the following jurisdictional levels of
government – central, provincial, municipal, and county (see details in Appendix A).
Central government ownership is the key level of government ownership. It is
established to form the basis from which China’s top global companies of the future are
created and firms owned by the Central Government account for a substantial share of
the economy. As central government ownership of companies such as energy or
defense-related firms is considered key to national security, the Central Government
maintains significant absolute or relative controlling stakes in such enterprises. Hence,
SOEs affiliated with the Central Government are under tighter government control than
firms affiliated with local governments at three jurisdictional levels: provincial,
municipal (or city), and county (or township).
iii) The monopolistic position of an SOE: A firm’s monopolistic position is
associated with a market share advantage derived from its ability to obtain concessions,
licenses, or sizeable government contracts. The Chinese discourse on SOEs contains a
15
number of terms that denote the importance of certain companies and sectors in terms
of their market power, such as “backbone enterprises,” “pillar enterprises,” and “giant
enterprises”; SOEs described in these terms are normally large firms that hold a
monopolistic position in the local economy, are important for generating fiscal revenue,
and play a vital role in economic development. 4 The stakes are higher for firms that
have monopoly power. Such firms may therefore be more sensitive to political scrutiny
and government control (Faccio, 2007).
iv) Strategic SOEs: the Chinese Government has identified seven sectors that are
considered strategically important as they are related to national or economic security
and maintains absolute control in these sectors through either sole ownership or an
absolute controlling stake (SASAC Chair Li Rongrong) (Mattlin, 2007). These seven
sectors are defense, power generation and distribution, oil and petrochemicals,
telecommunications, coal, aviation, and shipping. 5 For SOEs operating in these
strategic sectors, regulations dictate that firms’ decision-making procedures are
supplanted by the administrative process. The regulatory process that takes place in
such enterprises exposes firms’ decision making to more political forces and
government control and is likely to result in the imposition of political outcomes in
place of private decisions or market outcomes (Hadlock et al., 2002). The strategic
status of the industry in which a firm operates thus reflects the extent to which the firm
is subject to government control through regulations.
4.2 Model
4
The Chinese Government only recently specifically defined those enterprises that it considered to be critical or
important.
5
SASAC Chair Li Rongrong revealed that these seven sectors are considered strategically important as they are
related to national or economic security and that the government has to maintain absolute control over firms in these
sectors through either sole ownership or an absolute controlling stake. Many of the biggest and most monopolistic
Chinese companies operate within these seven industries.
16
To examine the sensitivity of management turnover to accounting measures of firm
performance, we apply a logistic model to test H1 as follows.
Logit(Turnoverit ) = α + β1 * Performanceit −1 + β 2 * CVit −1 + ε it
(1)
Where:
Turnover = a dummy variable equal to 1 if either the chairman or the chief executive
officer (CEO), or both, is (are) forced to leave the firm (other than for natural reasons
disclosed in the CSMAR database) and 0 otherwise;
Performance = an accounting measure of previous firm performance: return on assets
lagged one period ( ROAt −1 );
The definitions of CV , the control variables, are based on previous studies (Berry et al.,
2000; Clayton et al., 2003; Fan et al., 2007; Smith and Watts, 1992) and are listed as
follows:
Log (asset ) : the log of total assets, which is used to measure and control for firm
size. Berry et al. (2000) suggest that an increase in size increases management
entrenchment so that top executives are less likely to be found to be “incompetent”;
Leverage : equal to the ratio of total debt to total assets and used to control for the
firm’s financial risk. Gilson (1990) provides evidence that management turnover is
more prevalent in financially distressed firms;
Indus _ MB : the industry median market-to-book ratio by 2-digit SIC code, a
surrogate for the investment opportunity set (IOS). Prior research indicates that the IOS
may also be associated with management turnover because firms with a high IOS
demand high-quality managers (Smith and Watts, 1992);
Log (employee ) : the log of the number of employees. Some researchers argue that
management in state enterprises is also evaluated on the basis of social duties such as
maintaining and increasing employment (Fan et al., 2007). Hence, the government is
17
likely to replace the top executives if the unemployment rate is too high;
Log (GDP ) : the log of provincial GDP, a surrogate for regional variety. This is
associated with management turnover because of differences in local labor markets and
local economic development (Fan et al., 2007); and
Dual : a dummy variable equal to 1 for a manager who simultaneously holds the
chairman of the board and CEO positions. Prior studies suggest that the dual position of
chairman and CEO results in greater management power and entrenchment as
executives who simultaneously occupy both positions are less likely to leave their
company.
The first hypothesis predicts that β 1 will be negative and is consistent with the
disciplinary mechanism in which incompetent managers are dismissed when
performance is poor.
To test the second hypothesis about the interaction of government control and
corporate control, we extend Model 1 as follows.
Logit(Turnoverit ) = α + β1 * GCit −1 + β 2 * Performanceit −1 +
β 3 * Performanceit −1 * GCit −1 + β 4 CVit −1 + ε it
(2)
Where:
GC is one of four measures of government control which include concentration of
government ownership, jurisdictional level of government ownership, the monopolistic
position of an SOE, and whether or not the firm is a strategic SOE. These measures are
defined as follows. Concentration of government ownership (Own) is a dummy
variable equal to 1 if the proportion of shares owned by the government is above the
median level for the year and 0 otherwise. Jurisdictional level of government ownership
(Central) is a dummy variable equal to 1 for SOEs that are ultimately held by the
Central Government and 0 for those owned by a legal person or governed by a local
18
government (provincial, municipal, or county) (Fan et al., 2007; Sun et al., 2003). The
monopolistic position of an SOE ( L arg e _ MS ) is a dummy variable equal to 1 if firm
i’s market sales are above the median level for the year of all listed firms in the
province in which it is located and 0 otherwise. Finally, strategic SOE (Strategic) is a
dummy variable equal to 1 for an SOE in a regulated or strategic industry based on the
SIC code issued by the China Securities Regulatory Commission (CSRC), China’s
equivalent to the SEC. These regulated or strategic industries are described earlier in
this paper. All other variables are as defined in Model 1.
Hypothesis 2 (H2) focuses on the estimate of the interaction term β 3 , the coefficient
of the interaction terms for government control and the turnover-performance
relationship. If β 3 is negative, then there is a stronger inverse relationship between top
management turnover and firm performance, indicating that stronger government
control strengthens the turnover/performance relationship. In contrast, if β 3 is positive,
then there is a weaker inverse relationship between top management turnover and firm
accounting performance.
5 Data and Sample
The sample includes Chinese SOEs that were listed on the domestic Shanghai and
Shenzhen stock exchanges during the 2001-2005 period. We identify the ultimate
controller by examining the ownership structures of the sample firms as disclosed in
their annual reports. The management turnover data are downloaded from the CSMAR
dataset. To be included in the sample, firms have to have sufficient accounting data
available in the CSMAR dataset. In identifying forced turnover of top managers, we
exclude turnover events in which a top manager left because of retirement, health
19
reasons, change of ownership, or the end of a temporary appointment to the position, all
of which are natural reasons for turnover. This screening procedure ensures that only
forced top management turnovers are captured in our analysis. To mitigate the outlier
effect, we truncate the top and bottom 1% of the distribution for return on assets, total
assets, net sales, total debt, and earnings before interest and taxes (EBIT). The final
sample consists of 918 unique SOE firms and 4,096 firm-year observations.
Table 1 reports the descriptive statistics for the sample firms. For each variable used
in the regression model, we report the mean, median, and standard deviation across two
sets of sample firms, one being the sub-sample in which top management changed
during the year and the other sub-sample consisting of firms in which there was no
turnover in top management. The first two variables reported in Table 1 are accounting
measures of firm performance used in previous studies (Engel et al., 2003; Chang and
Wong, 2006; Kato and Long, 2006; Weisbach, 1988). Although the firms with
management turnover on average demonstrate both positive current performance
( ROAit ) and positive lagged performance ( ROAit −1 ), they significantly underperform
the non-turnover group (t-value = 5.26, significant at the 1% level for ROAit and t-value
= 2.27, significant at the 5% level for ROAit-1). The next two variables measure
concentration of government ownership. The t-test for the difference between the two
sub-samples shows that the ownership proportion for the management turnover group is
similar to that of the non-turnover group. The next variable reported in Table 1 is the
jurisdictional level of government ownership. We find that management turnover is
more likely to occur in SOEs with central government ownership/control. A
comparison of SOE market shares in terms of sales shows that the management
turnover group has a somewhat lower market share than the non-turnover group. The
results also shows that the frequency with which management-turnover firms appear in
20
a strategic industry is significantly lower than that of no-turnover firms, which is
consistent with the argument that strategic or regulated industries are subject to less
competitive labor market conditions.
[Insert Table 1 here]
6 Empirical Results
6.1 Results for the Relationship between Top Management Turnover and Firm
Performance (H1)
Table 2 presents the correlation matrix of the independent variables included in the
logit analysis. Although many of the measures are significantly correlated, the
magnitude of the correlations (absolute value < 0.4) does not indicate potential
problems of multicollinearity.
[Insert Table 2 here]
We test the first hypothesis by performing a likelihood analysis in which we regress
the likelihood of top management turnover on the accounting performance measure and
several control variables in Model 1. The dependent variable is coded 1 for
management turnover firm–year observations and 0 for non-turnover observations.
Consistent with the hypothesis that the frequency of management turnover is negatively
associated with the firm’s prior accounting performance, the results show that the
coefficient on firm accounting performance is significantly negative (-1.06; p-value =
0.033). Regarding the control variables in the regression, firm size has a negative but
insignificant influence on the likelihood of management turnover. Management
turnover is more frequent in firms that face higher financial risks, i.e., firms with higher
debt-to-asset ratios, as evidenced by Gilson (1990). The industrial MB ratio has a
significantly negative influence on the likelihood of management turnover, implying
21
that growing firms have less management turnover. As expected, the existence of a top
manager in a dual role has a significantly negative influence on management turnover.
This is consistent with the results of prior studies showing that the appointment of the
same individual to the positions of chairman and CEO results in less management
turnover because such individuals become entrenched in their positions. Regional
variety ( Log (GDP ) ) and social duties ( Log (employ) ) have no significant influence on
senior management turnover.
[Insert Table 3 here]
6.2 Results for the interaction of Government Control and the TurnoverPerformance Relationship (H2)
We next examine whether the inverse relationship between top management turnover
and firm accounting performance is stronger or weaker in firms with tighter
government control. We test the second hypothesis by estimating a logit model to
which we add an interaction term for the firm performance measure and timing as a
variable proxy for government control. The four proxies we employ of the extent of
government control are concentration of government ownership, jurisdictional level of
government ownership, the monopolistic position of the SOE, and whether or not the
SOE is in a strategic industry.
The first column of Table 4 reports the results for the interaction term including
concentration
of
government
ownership.
As
expected,
the
coefficient
of
Performanceit −1 * Ownit −1 is negative and is not statistically significant.
The second column of Table 4 reports the results for the interaction term including
jurisdictional level of government ownership. For the interaction term including the
dummy variable for central or direct local government ownership ( Central ) and
22
previous
firm
performance,
column
(2)
shows
that
the
coefficient
of
Performanceit −1 * Central it −1 is negative and significant (-2.78; p value = 0.029). This
finding suggests that when an SOE is controlled by the Central Government, rather
than by a less powerful local government, the inverse relationship between top
management turnover and firm performance is stronger and performance-based
turnover decisions are enforced more effectively.
The third column of Table 4 reports the results for the interaction term including the
monopolistic
position
of
SOEs.
The
coefficient
on
the
interaction
term Performanceit −1 * L arg e _ MS it −1 is negative and significant (-2.25; p-value =
0.051). This finding suggests that SOEs that have a greater market share in the local
economy (based on provincial unit) make an important contribution to the fiscal
revenue of the local economy and that the government has a greater interest in the
firm’s performance, making it more likely that top management turnover will be tied
more closely to poor firm performance.
The final column of Table 4 reports the results for the interaction term including the
strategic importance of SOEs. The results show that the coefficient of
Performanceit −1 * Strategicit −1 is negative and significant (-3.56; p-value = 0.001). This
finding suggests that for SOEs in one of the seven strategic industrial sectors – defense,
power generation and distribution, oil and petrochemicals, telecommunications, coal,
aviation and shipping – all of which are subject to more stringent regulatory processes
and control, the inverse relationship between top management turnover and firm
performance is stronger.
[Insert Table 4 here]
7 Additional Tests
23
In this section, we perform additional tests to provide more evidence in support of
our findings.
7.1 Regional Institutional Factors
We conjecture and find that government control complements and strengthen the
corporate control of top-manager turnover in China, an environment that lacks good
investor protection and a well-functioning capital market. As argued in this paper, this
complementary effect could be affected by the firm’s local institutional conditions and
the complementary relation between government control and corporate control is
expected to be stronger in regions with poor investor protection or undeveloped market
institutions.
To investigate the complementary effect in regions with different institutional
environments, we stratify the full sample according to regional institutional factors and
re-run Model 2 on alternative sub-samples to examine whether the documented
relations persist in these sub-samples. We partition the sample by the yearly median
value of the ratio of stock market capitalization to local GDP in a given region
(province), the number of firms listed in a given region (province), and the number of
initial public offerings of equity in a given region (province). La Porta, Lopez-deSilanes, Shleifer and Vishny (1997) use a sample of 49 countries and provide evidence
that these three variables measuring the size, breadth, and valuation of capital markets
are positively associated with investor protection. We also partition the sample by the
yearly median value of the comprehensive marketization index of regions/provinces in
China investigated by Fan and Wang (2004, 2007).
Table 5 reports the results of the sub-sample regressions. Panel A partitions the
sample by the yearly median value of the ratio of stock market capitalization to local
GDP in a given region (province). The results show that the interaction of government
24
control and firm performance ( Performanceit −1 * GC it −1 ) is significantly negative if the
ratio of the stock market capitalization of firms in the region to local GDP is low where
government control is measured by the concentration of government ownership
(column (1)) or central/direct local government control (column (2)). However, the
inverse relation does not persist or is not significant if the firms are in regions with a
high ratio of the stock market capitalization to local GDP. In columns (3) and (4),
where the government control is measured by the market shares of firms and strategic
industries, respectively, the results for the low and high sub-samples are not
significantly different. Panel B partitions the sample by the yearly median value of the
number of firms listed in a given region (province) and Panel C divides the sample by
the yearly median value of the number of initial public offerings of equity in a given
region (province). The results in both panels show that the interaction of government
control and firm performance ( Performanceit −1 * GC it −1 ) is persistently negative in
regions with a low number of listed firms for all measures of government control.
However, the inverse relation does not exist or is not significant for regions with a high
number of listed firms. Panel D partitions the sample by the yearly median value of the
comprehensive marketization index of regions/provinces in China (Fan and Wang, 2004,
2007). The results show that the interaction of government control and firm
performance ( Performanceit −1 * GC it −1 ) is significantly negative if the firms are from
regions with low marketization indices, where government control is measured by the
concentration of government ownership (column (1)). However, the inverse relation is
not significant if the firms are from regions with high marketization indices. In column
(2) and column (3), where government control is measured by central/direct local
government control and the market shares of firms, respectively, the results for the low
and high sub-samples are not significantly different. In column (4), where government
25
control is measured by whether or not the firm is in a strategic industry, the interaction
term Performanceit −1 * GC it −1 is significantly negative regardless of whether the firms
are from a region with a high or low marketization index. However, the economic effect
of the interaction is stronger in the low sub-sample than in the high sub-sample (-4.39
in the low sub-sample vs. -2.30 in the high sub-sample). Overall, the sub-sample
regression results corroborate the results in Table 4, providing further support for the
argument that the complementary relation between government control and corporate
control is more prominent in regions with poor investor protection or poor market
institutions.
[Insert Table 5 here]
7.2 Endogeneity Concern
Due
to
the
fact
that
government
administrators
control
not
only
the
appointment/dismissal of top managers but also the approval of large investment
projects and asset disposals, it is possible that top management turnover and firm
performance are both endogenously determined by omitted institutional factors. To
address this potential problem, we follow Fan et al. (2007) and re-run Model (1) as in
Table 3 on subsamples alternately stratified by firm and regional institutional factors to
evaluate whether the documented relations persist in the subsample regressions.
Specifically, we partition the sample by the sample median value of (1) local
(provincial) GDP, (2) local fiscal deficit levels, (3) local unemployment rates, and 4)
firm return on sales (ROS) respectively.
Table 6 reports the results of the subsample regressions. Top management turnover is
negatively and significantly associated with firm performance regardless of whether
they are from regions with high or low GDP, healthy or poor fiscal conditions, high or
26
low employment rates, or whether the SOEs have high or low ROS. The sub-sample
regression results confirm that the results in Table 3 are not affected by the regional
institutional factors, thus providing additional support for the robustness of the findings.
[Insert Table 6 here]
7.3 Alternative Firm Performance Measures
An alternative measure for firm performance employed in the prior literature is firm
market performance (stock price). We re-run our tests using stock price performance
(cumulative return based on 12 monthly returns) and alternatively, Tobin’s Q to
measure firm performance. 6 The unreported results show no significant association
between management turnover and firm market performance in SOEs. This result is
consistent with prior studies using SOEs as the sample. For example, Chang et al.
(2004) find that managerial change and selection in Chinese SOEs is not significantly
associated with stock price performance because state-owned shares are usually nontradable and can be transferred only on receiving administrative approval. SASAC
officials and other bureaucrats who exercise control on behalf of the government are
unable to capture any capital gains for themselves when enterprise shares are not
transferred. Consequently, state owners may be less concerned about long-term
shareholder value as reflected in stock prices; Firth et al. (2006) also show that
chairman turnover is related to a firm’s profitability but not to its stock returns in
Chinese listed firms. But they don’t provide any explanations; Peng and Luo (2000)
(page 492) suggest that ROA is a preferred measure for Chinese firm performance
because accounting for assets in China is typically more accurate than that for equity as
the equity contributions for a majority of Chinese firms are historically ambiguous, thus
6
, wherein the non-tradable state shareholdings are
valued by the market price of tradable state shareholdings.
27
rendering it difficult to compute the stock return.
We also conduct robustness tests by using measures of adjusted firm performance
such as ROA adjusted by industrial mean ROA. The unreported results are consistent
with the results derived using firm-specific ROA and imply that the state owner
normally uses earnings as a criterion in making management turnover decisions.7
7.4 Redefining the Concentration of Government Ownership
Although the result for the interaction including concentration of government
ownership is not significant, government ownership is a critical method of government
control. We therefore redefine concentration of government ownership to check on the
robustness of the earlier finding. First, we re-run the model by using an indicator
variable for a high level of government ownership in which we set the cutoffs for a high
degree of government ownership at the 20%, 50%, or 75% shareholding level. The
interaction results remain insignificant. Second, we partition the sample into two subsamples according to whether the firm has a high/low proportion of government
ownership and run Model 1 using these sub-samples. For both the high and low
government ownership level sub-samples, the likelihood of management turnover is
significantly inversely associated with the two accounting measures of firm
performance.
8 Conclusions
This study examines the turnover-performance relationship in Chinese SOEs by first
addressing the following question: “is corporate control through performance-based
turnover decisions effective in businesses subject to a high degree of government
7
This may be because the government can solicit accounting information (Stigler, 1971; Laffont, 1994) and earnings
are a single summary of firm performance that is easily understood.
28
control such as Chinese SOEs, which operate in an institutional environment
characterized by a mixture of capitalism and socialism?” Our findings show that the
likelihood that top SOE management will be replaced increases when firm accounting
performance is poorer. The evidence presented here suggests that given the interests of
the Chinese Government in economic performance since it introduced its program of
economic reforms, rather than relying on external market pressure, government owners
of SOEs adopt a control mechanism that ties top management turnover to firm
performance.
Second, we investigate the intertwining role government control plays in the
corporate governance of Chinese SOEs. We measure government control by four
metrics: concentration of government ownership, jurisdictional level of government
ownership, the monopolistic position (or market share) of the firm, and whether the
firm is in a strategic industry. Overall, the findings show that stronger government
control enhances the inverse relationship between top management turnover and firm
accounting performance. The results of our additional tests provide further evidence
that the complementary relation between government control and corporate control is
more prominent in regions with poor investor protection or poor market institutions.
Our findings are important given the debate on whether privatization is an essential step
for improving the performance of SOEs. Chinese SOEs have been criticized for their
potentially inefficient decisions and the ineffectiveness of their governance systems.
Despite the criticism of government influence in Chinese enterprises, our results
suggest that government control in SOEs plays a positive role in ensuring the
establishment of effective internal governance structures and provides a partial
explanation for the success of China’s economic reforms.
29
APPENDIX
Appendix A: Some key characteristics of jurisdictional regions in China (source: Chinese
Government Year Books)
1. Country/township level
This level is under the jurisdiction of the municipal level and consists of around
2,148 counties and 48,697 townships.
2. Municipal level
This level is under the jurisdiction of the municipal level and consists of around 333
municipalities/cities.
3. Provincial level
This level consists of 27 provinces including Hebei, Shanxi, Inner Mongolia,
Liaoning, Jilin, Heilongjiang, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, Shandong,
Henan, Hubei, Hunan, Guangdong, Guangxi, Hainan, Sichuan, Guizhou, Yunnan, Tibet,
Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang, as well as the 4 “directly ruled
municipalities” of Beijing, Tianjin, Shanghai, and Chongqing (Chongqing was
affiliated with Sichuan Province before 1997 but has been one of the “directly ruled
municipalities” since then).
4. Central level
The central level is the ultimate level and the Central Government (guided by the
Communist Party) holds the ultimate control rights.
30
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34
Table 1: Descriptive statistics for firms by sub-sample. The turnover group, assigned
the value of 1, comprises firms in which there was a change in either the chairman or
the CEO during the 2001-2005 period; the no-turnover group, assigned the value of 0,
comprises firms in which there was no change in top management.
Variable
N
Turnover
1222 1
2874 0
1222 1
ROAt −1
2874 0
1222 1
Own
2874 0
1222 1
High _ Own
2874 0
1222 1
Central
2874 0
1222 1
MS
2874 0
1222 1
L arg e _ MS
2874 0
1222 1
Strategic
2874 0
1222 1
Log (assets)
2874 0
1222 1
Leverageit
2874 0
1222 1
Indus _ MB
2874 0
1222 1
Log (employ)
2874 0
1222 1
Log (GDP )
2874 0
1222
1
Dual
2874 0
Variable definitions: refer to sections 4.1 and 4.2
ROAt
35
Mean
Median
0.009
0.021
0.008
0.020
0.391
0.389
0.404
0.385
0.258
0.230
0.290
0.303
0.516
0.556
0.555
0.585
21.14
21.24
0.509
0.480
2.507
2.462
7.380
7.454
8.538
8.563
0.061
0.102
0.019
0.025
0.024
0.030
0.390
0.385
0
0
0
0
0.093
0.110
1
1
1
1
21.11
21.18
0.491
0.475
2.259
2.243
7.430
7.565
8.596
8.596
0
0
Std.
Dev.
0.067
0.058
0.164
0.119
0.148
0.144
0.491
0.487
0.438
0.421
0.363
0.362
0.500
0.497
0.497
0.493
0.818
0.791
0.339
0.240
1.037
0.942
1.226
1.170
0.837
0.799
0.240
0.302
Diff. (1-0)
(t-test)
-0.012
(5.26***)
-0.012
(2.27**)
0.002
(-0.20)
0.019
(-1.16)
0.028
(-1.86*)
-0.013
(1.05)
-0.040
(2.35**)
-0.030
(1.76*)
-0.10
(3.60***)
0.029
(-2.77***)
0.045
(-1.32)
-0.074
(1.78*)
-0.025
(0.87)
-0.041
(4.53***)
Table 2: Pearson correlations between independent variables (p-value in parentheses)
Variable
ROA(t)
ROA(t-1)
Own
Central
MS
Strategic
Log(asset)
Leverage
Indus_MB
Log(GDP)
Log(employ)
Dual
ROA
(t)
ROA
(t-1)
Own
Central
MS
Strategic
Log
(asset)
Leverage
Indus
_MB
Log
(GDP)
Log
(employ)
Dual
1
0.19
(<.01***)
0.12
(<.01***)
0.03
(0.04**)
0.06
(<.01***)
0.07
(<.01***)
0.21
(<.01***)
-0.30
(<.01***)
0.08
(<.01***)
0.03
(0.03**)
0.05
(0.00***)
-0.03
(0.03**)
1
0.06
(0.00***)
-0.01
(0.51)
0.07
(<.01***)
0.03
(0.09*)
0.13
(<.01***)
-0.31
(<.01***)
0.03
(0.05**)
-0.00
(0.76)
0.02
(0.12)
-0.04
(0.01***)
1
0.07
(<.01***)
0.02
(0.16)
0.10
(<.01***)
0.12
(<.01***)
-0.11
(<.01***)
-0.00
(0.97)
0.02
(0.28)
0.08
(<.01***)
-0.06
(<.01***)
1
-0.10
(<.01***)
0.14
(<.01***)
0.00
(0.98)
-0.01
(0.45)
0.04
(0.01***)
-0.00
(0.94)
-0.03
(0.06**)
-0.05
(<.01***)
1
0.06
(<.01***)
0.16
(<.01***)
-0.03
(0.06*)
-0.03
(0.09*0
-0.07
(<.01***)
0.22
(<.01***)
-0.02
(0.30)
1
0.03
(0.03**)
-0.06
(0.00***)
-0.07
(<.01***)
-0.05
(<.01***)
0.15
(<.01***)
-0.07
(<.01***)
Note: *** = p < 1%, ** = p < 5%, * = p < 10%.
36
1
0.01
(0.46)
-0.13
(<.01***)
0.12
(<.01***)
0.42
(<.01***)
-0.02
(0.22)
1
-0.09
(<.01***)
0.06
(0.00***)
0.04
(0.02**)
0.02
(0.14)
1
-0.19
(<.01***)
-0.03
(0.10*)
-0.03
(0.03**)
1
0.03
(0.04**)
-0.02
(0.31)
1
-0.02
(0.29)
1
Table 3: The Relationship Between Management Turnover and Firm Performance
(Model 1)
See section 4.1 and 4.2 for variable definitions. The dependent variable is the likelihood of
management turnover. Performanceit −1 is measured by accounting measures, ROA is
lagged one period. (P-value in parentheses: *** p < 1%, ** p < 5%, * < 10%)
Variable
Expected
sign
Intercept
Performanceit −1
-
Log (assetsit −1 )
-
Leverageit −1
+
Indus _ MBit −1
+
Log (GDPit −1 )
+/-
Log (employit −1 )
-
Dualit −1
-
-0.54
(0.014***)
-0.58
(0.030**)
Yes
Yes
4096
0.014
Year _ dummy
Indus _ dummy
Obs. #
Pseudo-R-sq
37
7.74
(<.0001***)
-1.06
(0.033**)
-0.07
(0.236)
0.40
(0.018**)
-1.12
(<.0001***)
0.01
(0.809)
-0.03
（0.519
-0.51
(<.0001***)
Yes
Yes
4096
0.12
Table 4: The influence of government control ( GCit −1 ) on the relationship between top
management turnover and firm accounting performance measures with control variables (Model
2)
See sections 4.1 and 4.2 for variable definitions. The dependent variable is the likelihood of
management turnover. Performanceit −1 is measured by ROA lagged one period. GC it −1 is defined as:
(1) the concentration of government ownership, measured by a dummy equal to 1 if the proportion of
ownership is above the median level for the year; (2) jurisdictional government control, measured by a
dummy variable equal to 1 if the SOE is affiliated with the Central Government; (3) monopolistic
position of SOE, measured by a dummy variable equal to 1 if the SOE’s market sales are above the
median level of sales in the provincial unit where it is located; (4) the strategic industries, measured by
a dummy variable equal to 1 if the SOE is in one of seven industries which are strategically regulated
by the government. (P-value in parentheses: *** p < 1%, ** p < 5%, * < 10%)
Variable
Intercept
Performanceit −1
GCit −1
(1)
GC =
Government
Ownership (%)
above median
7.76
(<.0001***)
+/-
Expected
sign
Performanc e it −1 * GC it −1
-
Log (assetsit −1 )
-
(2)
GC = Central
Government
Control
3.42
(0.008***)
(3)
GC =
Monopolistic
Position by
Market Share
6.87
(<.0001***)
(4)
GC =
Strategic
Industries
7.13
(<.0001***)
-1.03
(0.132)
1.52
(0.214)
-0.48
(0.408)
0.02
(0.977)
0.04
(0.650)
-0.95
(0.211)
-0.05
(0.672)
-0.08
(0.469)
-0.13
(0.109)
-2.58
(0.049**)
-2.25
(0.051**)
-3.56
(0.001***)
-0.07
-0.14
-0.03
-0.06
(0.229)
(0.020**)
(0.704)
(0.313)
Leverageit −1
+
0.41
(0.017**)
0.32
(0.045**)
0.40
(0.018**)
0.43
(0.013***)
Indus _ MBit −1
+
-1.12
(<.0001***)
-0.29
(<.0001***)
-1.12
(<.0001***)
-1.02
(<.0001***)
Log (GDPit −1 )
+/-
0.01
(0.812)
-0.03
(0.503)
0.006
(0.915)
0.02
(0.641)
Log (employit −1 )
-
-0.03
(0.518)
0.02
(0.654)
-0.02
(0.621)
-0.02
(0.617)
Dualit −1
-
-0.51
(<.0001***)
-0.62
(<.0001***)
-0.50
(0.001***)
-0.51
(<.0001***)
Yes
Yes
Yes
Yes
Yes
4096
0.12
Yes
4096
0.04
Yes
4096
0.08
Yes
4096
0.12
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
38
Table 5: Regression results of the interaction effects of government control and turnover-performance relationship in China’s SOEs using sub-samples stratified by regional institutional factors used
as proxies for investor protection or market development. The sample is partitioned alternatively by the yearly median value of the ratio of stock market capitalization to local GDP in a given region
(province), the number of firms listed in a given region (province), the number of initial public offerings of equity in a given region (province) (La Porta, Lopez-de-Silanes, Shleifer and Vishny
(LLSV), 1997) and the comprehensive marketization index of regions/provinces in China investigated by Fan and Wang (FW) (2004, 2007). The dependent variable is the likelihood of management
turnover.
Performanceit −1
is measured by ROA lagged one period.
GC it −1
is defined as: (1) the concentration of government ownership, measured by a dummy equal to 1 if the proportion of
ownership is above the median level for the year; (2) jurisdictional government control, measured by a dummy variable equal to 1 if the SOE is affiliated with the Central Government or is directly
held by a local government; (3) monopolistic position of SOE, measured by a dummy variable equal to 1 if the SOE’s market sales are above the median level of sales in the provincial unit where it
is located; (4) the strategic industries, measured by a dummy variable equal to 1 if the SOE is in one of seven industries which are strategically regulated by the government. (P-value in parentheses:
*** p < 1%, ** p < 5%, * < 10%)
GC(1)
GC(2)
GC(3)
GC(4)
Panel A: partition by the stock market
Expected
capitalization in a given region (LLSV, 1997)
sign
Low
High
Low
High
Low
High
Low
High
Intercept
-0.40
9.11
-0.82
9.07
-2.06
8.06
-1.01
8.86
(0.824) (<.0001***)
(0.649 (<.0001***)
(0.330)
(0.001***)
(0.545) (<.0001***)
Performanc
e it − 1
-
0.06
(0.939)
-0.49
(0.331)
(1.78
(0.421)
1.26
(0.382)
-1.39
(0.108)
0.30
(0.674)
-0.34
(0.631)
1.38
(0.177)
GCit −1
+/-
0.20
(0.086*)
0.04
(0.745)
-0.31
(0.072*)
0.29
(0.129)
-0.21
(0.131
-0.12
(0.478)
-0.12
(0.273)
0.04
(0.748)
Performanc e it −1 * GC it −1
-/+
-3.91
(0.009***)
0.58
(0.554)
-3.92
(0.094*)
-1.79
(0.236)
0.78
(0.530)
-1.13
(0.272)
-3.43
(0.016**)
-3.07
(0.046**)
0.008
-0.36
0.03
-0.36
0.09
-0.30
0.01
-0.35
(0.926)
(0.0002***)
(0.686)
(0.0002***)
(0.395)
(0.009***)
(0.861)
(0.0002***)
Log ( assets
it −1
)
-
Leverageit −1
+
0.43
(0.029**)
-0.16
(0.677)
0.39
(0.042**)
-0.15
(0.691)
0.44
(0.027**)
-0.12
(0.754)
0.42
(0.029**)
0.08
(0.826)
Indus _ MB
+
-0.30
(0.003***)
0.08
(0.279)
-0.38
(0.0003***)
-0.28
(0.0004***)
-0.24
(0.019**)
0.08
(0.308)
-0.40
(0.0002***)
-0.28
(0.0006***)
-0.28
(0.005***)
0.09
(0.248)
-0.37
(0.0003***)
-0.29
(0.0003***)
-0.30
(0.001***)
0.10
(0.208)
-0.35
(0.0004***)
-0.25
(0.001***)
Log
( GDP
it − 1
it − 1
)
+/-
Log (employit −1 )
-
-0.08
(0.142)
0.22
(0.002***)
-0.07
(0.190)
0.21
(0.003***)
-0.08
(0.177)
0.23
(0.002***)
-0.07
(0.177)
0.18
(0.005***)
Dual
-
-0.50
(0.012***)
-0.86
(0.002***)
-0.56
(0.005***)
-0.89
(0.002***)
-0.53
(0.007***)
-0.84
(0.003***)
-0.54
(0.005***)
-0.75
(0.006***)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
2344
0.04
Yes
1718
0.09
Yes
2344
0.04
Yes
1718
0.09
Yes
2344
0.04
Yes
1718
0.09
Yes
2344
0.04
Yes
1718
0.07
it − 1
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
39
Panel B: partition by the
number of firms listed in a
given region (LLSV, 1997)
Intercept
Performanceit −1
GC(1)
Expected
sign
-
GCit −1
+/-
Performanc e it −1 * GC it −1
-/+
GC(2)
GC(3)
GC(4)
Low
6.46
(0.003***)
High
2.69
(0.100*)
Low
6.22
(0.005***)
High
2.66
(0.104*)
Low
2.19
(0.406)
High
3.17
(0.100*)
Low
6.45
(0.002***)
High
2.48
(0.112)
1.00
(0.410)
-0.56
(0.238)
2.82
(0.277)
0.76
(0.514)
0.58
(0.624)
-0.60
(0.286)
1.55
(0.316)
0.10
(0.857)
0.26
(0.085*)
-6.96
(0.003***)
0.01
(0.923)
-0.08
(0.919)
-0.20
(0.325)
-4.61
(0.104*)
-0.08
(0.620)
-1.69
(0.179)
-0.46
(0.012****)
-3.27
(0.119)
0.06
(0.638)
0.01
(0.985)
0.25
(0.088*)
-4.50
(0.026**)
-0.26
(0.013***)
-2.27
(0.073*)
Log (assetsit −1 )
-
-0.31
(0.004***)
-0.07
(0.338)
-0.31
(0.005***)
-0.07
(0.376)
-0.12
(0.343)
-0.10
(0.290)
-0.35
(0.0006***)
-0.05
(0.526)
Leverageit −1
+
-0.04
(0.920)
0.47
(0.015**)
-0.19
(0.650)
0.46
(0.016**)
0.03
(0.944)
0.47
(0.015**)
0.21
(0.606)
0.45
(0.017**)
Indus _ MBit −1
+
-0.23
(0.053**)
-0.32
(0.0003***)
-0.19
(0.106)
-0.32
(0.0004***)
-0.21
(0.083*)
-0.32
(0.0003***)
-0.26
(0.022**)
-0.32
(0.0001***)
Log (GDPit −1 )
+/-
-0.10
(0.214)
-0.11
(0.164
-0.08
(0.317)
-0.12
(0.131)
-0.09
(0.289)
-0.11
(0.171)
-0.08
(0.320)
-0.09
(0.221)
Log (employit −1 )
-
0.19
(0.015**)
-0.04
(0.417)
0.21
(0.008***)
-0.04
(0.458)
0.22
(0.006***)
-0.04
(0.385)
0.21
(0.004***)
-0.07
(0.113)
Dualit −1
-
-0.45
(0.057*)
-0.80
(0.0003***)
-0.48
(0.042**)
-0.81
(0.0003***)
-0.40
(0.092*)
-0.80
(0.0003***)
-0.35
(0.128)
-0.80
(0.0003***)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1515
0.07
Yes
2547
0.05
Yes
1515
0.07
Yes
2547
0.05
Yes
1515
0.07
Yes
2547
0.05
Yes
1515
0.05
Yes
2547
0.05
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
40
Panel C: partition by the number of
initial public offerings of equity in
a given region (LLSV, 1997)
Intercept
Performanceit −1
GC(1)
Expected
sign
-
GCit −1
+/-
Performanc e it −1 * GC it −1
-/+
GC(2)
GC(3)
GC(4)
Low
0.18
(0.930)
High
6.20
(0.009***)
Low
-0.18
(0.933)
High
5.92
(0.013***)
Low
0.30
(0.903)
High
2.65
(0.339)
Low
-0.62
(0.758)
High
5.70
(0.010***)
-0.70
(0.295)
0.07
(0.936)
5.69
(0.091*)
0.31
(0.770)
-1.09
(0.246)
0.05
(0.951)
-1.00
(0.295)
1.05
(0.263)
0.12
(0.368)
-3.87
(0.026**)
0.25
(0.096*)
0.09
(0.942)
-0.03
(0.907)
-9.01
(0.010***)
-0.11
(0.618)
-0.30
(0.817)
0.11
(0.536)
-3.39
(0.086*)
-0.44
(0.023**)
0.54
(0.734)
-0.07
(0.579)
-2.50
(0.152)
-0.29
(0.046**)
-3.36
(0.053**)
Log (assetsit −1 )
-
-0.01
(0.893)
-0.28
(0.014***)
0.02
(0.857)
-0.26
(0.023***)
-0.02
(0.874)
-0.10
(0.478)
0.02
(0.828)
-0.21
(0.051**)
Leverageit −1
+
0.46
(0.032**)
0.02
(0.962)
0.45
(0.038**)
-0.04
(0.922)
0.50
(0.028**)
-0.003
(0.995)
0.47
(0.032**)
0.08
(0.843)
Indus _ MBit −1
+
-0.27
(0.009***)
-0.36
(0.003***)
-0.23
(0.030**)
-0.34
(0.006***)
-0.26
(0.012***)
-0.34
(0.004***)
-0.27
(0.005***)
-0.30
(0.007***)
Log (GDPit −1 )
+/-
0.01
(0.920)
-0.20
(0.093*)
-0.02
(0.842)
-0.22
(0.078*)
0.02
(0.822)
-0.24
(0.052**)
0.03
(0.787)
-0.18
(0.137)
Log (employit −1 )
-
-0.005
(0.945)
0.10
(0.173)
-0.01
(0.906)
0.11
(0.165)
-0.02
(0.764)
0.12
(0.118)
-0.03
(0.615)
0.05
(0.473)
Dualit −1
-
-0.45
(0.062*)
-0.86
(0.009***)
-0.51
(0.036**)
-0.89
(0.007***)
-0.45
(0.065*)
-0.88
(0.008***)
-0.47
(0.049**)
-0.89
(0.006***)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1756
0.06
Yes
1360
0.08
Yes
1756
0.07
Yes
1360
0.08
Yes
1756
0.06
Yes
1360
0.08
Yes
1756
0.04
Yes
1360
0.05
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
41
GC(1)
Panel D: partition by regional
market index (FW, 2007)
Intercept
Performanceit −1
Expected
sign
-
GCit −1
+/-
Performanc e it −1 * GC it −1
-/+
GC(2)
GC(3)
GC(4)
Low
7.43
(0.006***)
High
2.19
(0.174)
Low
7.98
(0.003***)
High
2.15
(0.182)
Low
5.68
(0.075*)
High
1.35
(0.464)
Low
7.24
(0.004***)
High
2.04
(0.189)
0.42
(0.706)
-0.43
(0.338)
1.52
(0.488)
1.39
(0.324)
-0.24
(0.835)
-0.40
(0.478)
1.52
(0.288)
0.07
(0.900)
0.06
(0.715)
-5.45
(0.030**)
0.15
(0.133)
-0.39
(0.619)
-0.04
(0.861)
-2.73
(0.268)
-0.04
(0.776)
-2.46
(0.101)
-0.27
(0.202)
-0.60
(0.785)
-0.11
(0.369)
-0.32
(0.700)
0.13
(0.406)
-4.39
(0.024**)
-0.17
(0.097*)
-2.30
(0.067*)
Log (assetsit −1 )
-
-0.28
(0.038**)
-0.10
(0.143)
-0.30
(0.026**)
-0.10
(0.182)
-0.19
(0.227)
-0.06
(0.495)
-0.29
(0.020**)
-0.10
(0.159)
Leverageit −1
+
0.05
(0.918)
0.40
(0.027**)
0.03
(0.956)
0.37
(0.039**)
0.11
(0.805)
0.40
(0.028**)
0.30
(0.498)
0.38
(0.032**)
Indus _ MBit −1
+
-0.40
(0.002***)
-0.29
(0.001***)
-0.41
(0.002***)
-0.28
(0.001***)
-0.40
(0.002***)
-0.29
(0.001***)
-0.41
(0.001***)
-0.29
(0.0003***)
Log (GDPit −1 )
+/-
-0.17
(0.082*)
0.02
(0.799)
-0.18
(0.064*)
0.006
(0.941)
-0.18
(0.061*)
0.006
(0.939)
-0.14
(0.125)
0.02
(0.801)
Log (employit −1 )
-
0.12
(0.214)
-0.01
(0.865)
0.13
(0.191)
-0.006
(0.896)
0.14
(0.166)
-0.005
(0.925)
0.11
(0.239)
-0.01
(0.843)
Dualit −1
-
-0.71
(0.022**)
-0.57
(0.003***)
-0.75
(0.017**)
-0.59
(0.002***)
-0.71
(0.023**)
-0.57
(0.002***)
-0.73
(0.019)
-0.57
(0.002***)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1098
0.07
Yes
2943
0.04
Yes
1098
0.07
Yes
2943
0.04
Yes
1098
0.07
Yes
2943
0.03
Yes
1098
0.06
Yes
2943
0.03
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
42
Table 6: We re-run Model (1) (as in Table 3) on subsamples alternately stratified by firm and regional institutional factors to examine whether the
predicted relations persist in the subsample regressions (Fan et al., 2007). We partition the sample by the sample median value of (1) local
(provincial) GDP, (2) local fiscal deficit levels, (3) local unemployment rates, and 4) firm return on sales (ROS). The negative relations between
top management turnover and firm’s performance (ROA) are robust in the subsamples.
Expected
sign
Intercept
Performanc
Log ( assets
e it − 1
it −1
)
Leverageit −1
Indus _ MB
Log
( GDP
-
+
it − 1
it − 1
)
Log (employ it −1 )
Dual
it − 1
Year _ dummy
Indus _ dummy
Obs. #
Pseudo R-sq.
-
(1) GDP
Low
High
30.48
22.98
(0.906)
(0.928)
-4.42
-5.00
(0.086*) (<.001***)
(2) Fiscal deficit
Low
High
22.21
27.18
(0.893)
(0.904)
-5.40
-5.04
(0.004***)
(0.029**)
(3) Unemployment rate
Low
High
27.59
21.37
(0.873)
(0.920)
-4.29
-5.33
(0.009***)
(0.009***)
(4) ROS
Low
High
28.18
23.03
(0.863)
(0.919)
-5.35
-4.39
(0.002***)
(0.026**)
-0.53
(0.019**)
-0.19
(0.059*)
-0.19
(0.060*)
-0.41
(0.042**)
-0.49
(<.001***)
-0.11
(0.419)
-0.38
(0.004***)
-0.26
(0.044**)
-0.30
(0.740)
-2.06
0.26
(0.541)
-1.17
0.46
(0.300)
-1.19
-0.69
(0.381)
-1.90
-0.05
(0.926)
-1.49
0.70
(0.262)
-1.26
0.88
(0.135)
-2.04
-0.23
(0.658)
-0.93
(<.001***)
(<.001***)
(<.001***)
(<.001***)
(<.001***)
(<.001***)
(<.001***)
(<.001***)
0.00
(0.522)
0.00
(0.148)
+0.00
(0.080*)
0.00
(0.362)
0.00
(0.194)
0.00
(0.282)
0.00
(0.220)
0.00
(0.951)
0.21
(0.149)
0.46
(0.238)
Yes
Yes
971
0.18
-0.04
(0.546)
-0.43
(0.065*)
Yes
Yes
3125
0.12
-0.06
(0.343)
-0.36
(0.125)
Yes
Yes
2945
0.12
0.23
(0.081*)
0.13
(0.715)
Yes
Yes
1151
0.17
0.188
(0.038**)
-0.60
(0.028**)
Yes
Yes
2285
0.16
-0.12
(0.130)
0.11
(0.702)
Yes
Yes
1811
0.13
0.03
(0.754)
-0.41
0.164
Yes
Yes
2021
0.18
0.021
(0.788)
-0.10
(0.713)
Yes
Yes
2075
0.09
43