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

42 Pages Posted: 17 Sep 2006

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)

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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.

Suggested Citation

Firth, Michael and Fung, Peter M.Y. and Rui, Oliver M., Firm Performance, Governance Structure, and Top Management Turnover in a Transitional Economy. Journal of Management Studies, Vol. 43, No. 6, pp. 1289-1330, September 2006, Available at SSRN: https://ssrn.com/abstract=930795 or http://dx.doi.org/10.1111/j.1467-6486.2006.00621.x

Michael Firth (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
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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

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

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