Appointment of Political Top Executives and Subsequent Performance and Corporate Governance: Evidence from China's Listed SOEs

62 Pages Posted: 18 Mar 2009

See all articles by Fang Hu

Fang Hu

Griffith University - The Department of Accounting, Finance & Economics

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: March 17, 2009

Abstract

This paper investigates the replacement and appointment of top executives in a business highly involved by the government and their consequences on firm performance and corporate governance. It provides a dynamic setting to test the value of political connection as prior studies do not discern government interests and incorporate ambiguous institutions and self-selection problems by cross-section test. Using data of China's listed state-owned enterprises (SOEs), this paper finds that the state owner is more likely to replace top executives and appoint a politically-connected executive when SOEs encounter economic distress such as poor ROA, earnings loss, high financial risk, or political distress such as SEC regulation violation. It implies that the politically-connected executive may be considered helpful by the government in response to firm distress. Further, it is found that the political top executives improve firm performance following their appointments and reduce the frequency of executives' illegal actions, by initiating modification of internal governance structures and mitigating manager's discretion. And those firms do not have preferential access to resources or government assistances such as fiscal subsidies, tax benefits, or the credit market. All these findings support that political executives could serve as a disciplinary or monitoring mechanism in a political economy lack of external market for corporate control and legal protection for investors, instead of being only a form of bail-out. Their efficacy is based on their administrative power, regulatory expertise and accountability to the government interests. These results provide better understanding of government interests and their impact on corporate governance.

Keywords: Appointment of top executives, Politically-connected executives, Firm performance, Corporate governance

JEL Classification: G30

Suggested Citation

Hu, Fang and Leung, Sidney, Appointment of Political Top Executives and Subsequent Performance and Corporate Governance: Evidence from China's Listed SOEs (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1361617 or http://dx.doi.org/10.2139/ssrn.1361617

Fang Hu (Contact Author)

Griffith University - The Department of Accounting, Finance & Economics ( email )

Nathan Queensland 4111
Australia
+61 7 3735 7559 (Phone)
+61 7 3735 3719 (Fax)

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7924 (Phone)
+852 2788-7944 (Fax)

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