Firm Performance, Governance Structure, and Top Management Turnover in a Transitional Economy

54 Pages Posted: 25 Mar 2003

See all articles by Michael Firth

Michael Firth

Lingnan University - Department of Finance and Insurance

Peter M.Y. Fung

Hong Kong Polytechnic University

Oliver M. Rui

China Europe International Business School (CEIBS); affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: April 2005

Abstract

Recent research has argued that political and regulatory environments have a significant impact on corporate governance systems. In particular, countries with poor investor protection laws and weak law enforcement have low levels of corporate governance that manifests itself in substandard financial performance, management entrenchment, and the expropriation of minority shareholders. One implication of this research is that China will have poor corporate governance and entrenched managers, as its legal system is relatively underdeveloped and inefficient. However, using data on top management turnover in China's listed firms, our results refute the prediction of entrenched management. We find evidence of very high turnover of company chairmen and there are many cases that we interpret to be forced departures. Our results show that chairman turnover is related to a firm's profitability but not to its stock returns. Turnover-performance sensitivity is higher if legal entities are major shareholders but the proportion of non-executive directors perversely affects it. We find no evidence that profitability improves after a change in chairman and this suggests that a firm's governance structure is ineffective as it is unable to recruit suitable replacements that can turn around its financial performance.

Keywords: Chairman turnover, corporate governance, p erformance

JEL Classification: G3, P2

Suggested Citation

Firth, Michael and Fung, Peter M.Y. and Rui, Oliver M. and Rui, Oliver M., Firm Performance, Governance Structure, and Top Management Turnover in a Transitional Economy (April 2005). Available at SSRN: https://ssrn.com/abstract=337843 or http://dx.doi.org/10.2139/ssrn.337843

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Peter M.Y. Fung

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

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Shanghai 201206
China
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86-21-28905620 (Fax)

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affiliation not provided to SSRN