Ceo Power, Risk-taking And Corporate Growth

The research on "risk-taking" has been the much-talked-about issue in finance and accounting in recent years, which has been paid more attention by academics, practice and policy departments especially after the financial crisis in U.S.A in 2008. A lot of studies have shown that the root of the financial crisis lies in the excessive risk-taking of the firm, and the excessive risk-taking is due to the improper control on the management power.Under the modern enterprise system of the separation of two rights, the contest for the decision-making power between the management and the board of directors has been an important issue of corporate governance. The board of directors has the absolute power on the decision-making theoretically, but in fact the control rights and the enterprise strategic decision are owned by the management especially by the CEOs who are at the top of the organizational structure. That is because of the corporate governance defects, such as the information asymmetry, "free rider" of the board of directors and "insider control", resulting in the transfer of corporate control rights to the management and the CEOs naturally. The internal governance structure of the highly centralized power will affect the level and volatility of the corporate performance, and then affect the level of the company’s risk-taking. In our country, where the professional managers market is still not established perfectly, CEOs of the listed company often come from controlling shareholder, evenly are pluralism by chairman or vice chairman directly. Particularly in the state owned firms, the coexistence phenomenon of "single big holder" and "absence of the owners" is serious. These cause that CEO power is over corporate governance and evenly has absolute influence on firm decision-making and implementation beyond the board of directors. Thus it can be seen, in our special corporate governance context, the problem of CEO power highly centralized is more serious and the effect of CEO power on the firm risk-taking will also be more prominent.Earlier studies proposed that firm risk-taking or risk behavior could make the company hold more favorable investment opportunity and projects, and got better return and development. However the financial crisis that occurred in the United States sounded the alarm to the world:the higher risk the company faces, the larger probability crises break out. Excessive risk-taking is not only against to the growth of the company, but also may make the company never recovered and even bankruptcy, which will cause serious economic consequences. At the same time, a large number of practical experiences also show that the enterprises, which are regardless of the risk and expand rapidly, tend to disappear more quickly. Under the background of American financial crisis and China economic transformation deepening, it is more urgent and more realistic for China and Chinese enterprises in the transition period, discussing the impact on the corporate growth caused by the excessive risk-taking behavior, and finding out the root to avoid recommit the same error.Therefore, it is necessary to draw into the investor protection and make a further discussion on the relationship between CEO power (internal governance mechanism), investor protection (external governance mechanism) and firm risk-taking, which discussion is based on the study of the relationship between CEO power and firm risk-taking.This paper chooses 1079 companies of Shenzhen Stock Exchange which are listed before December 31,2011. The main Analysis methods include the fixed, random effects model of unbalanced panel data and factor analysis. At the same time, the paper conducts some empirical studies on the relationship between CEO power, risk-taking and corporate growth, and the moderating effect of investor protection on the three. Following is the conclusions:1. The more power CEOs have, the higher risk-taking the firms will take.Through the empirical study we found that the more power CEOs have, the higher risk-taking the firms will take. The result shows that the relationship between CEO power and firm risk-taking in China’s listed company is more consistent with the inference of behavioral decision theory on "individual decision and extreme performance".2. The effect of CEO power on firm risk-taking in the state owned firms is higher than that of in the non-state owned firms.In our country, compared to those in non-state owned listed firms, the agency problem is more serious, and the risk-taking is also greater caused by CEO’s heavily centralized power in state owned listed firms.3. The effect of CEO power on firm risk-taking has been significantly reduced by the improvement of investor protection level.Through the investor protection index got through the factor analysis and empirical study, we found that the effect of CEO’s heavily centralized power on firm excessive risk-taking has been significantly moderated by the improvement of investor protection level. The higher level investor protection takes, the higher risk-taking the firms face.4. The moderating effect of investor protection on firm risk-taking in the state owned firms is higher than that of in the non-state owned firms.With the improvement of the investor protection level, the situation is changed significantly also, in which CEO power is lack of effective supervision especially in state owned firms for a long time. Therefore, the negative moderating effect of investor protection on firm risk-taking in the state owned firms is higher than that of in the non-state owned firms.5. The higher risk-taking the firms face, the worse growth the firms will have.The firm risk-taking is negative significantly to the corporate growth. That is to say, the higher risk-taking the firms are facing, the worse growth the firms will have.6. The negative effect of firm risk-taking on corporate growth in the state owned firms is higher than that of in the non-state owned firms.As mentioned before, the effect of CEO power on firm risk-taking in the state owned firms is higher than that of in the non-state owned firms. And firm risk-taking is negative significantly to the corporate growth. Basing on the two conclusions and upon further research, this paper finds that by empirical regression, the negative effect of firm risk-taking on corporate growth in the state owned firms is higher than that of in the non-state owned firms.7. There are no direct or significant relationships between CEO power, investor protection and corporate growth, but CEO power and investor protection plays an indirect role on corporate growth by influencing firm risk-taking.We test the correlation between CEO power, investor protection and corporate growth in the last part positive research of this paper. The results show that:CEO power and investor protection do not affect directly corporate growth, only put into work indirectly by the effect of firm risk-taking. At the same time, the difference of the corporate growth in the state owned and non-state owned firms is also only decided by the difference of firm risk-taking, in other words, CEO power and the investor protection could not play a direct role on it.The innovations of this paper are:1. The paper discussed the relation between CEO power, investor protection and firm risk-taking on the perspective of interaction affect of the internal and external corporate governance mechanism.At present, the related literatures that study the effect of the corporate internal governace mechanism -- CEO’s highly centralized power on firm risk-taking is relatively uncommon. In particular, the further studies is very rare which focus on the moderating role investor protection on the relationship between CEO power and risk-taking on the perspective of interaction affect of the internal and external corporate governance mechanism. The study of this paper not only enriches the discussion on the relationship between corporate governance and corporate risk-taking, also offers some evidences coming from firm for the fluctuation of macro economy.2. The factor of firm risk-taking is tentatively introduced into the study about the corporate’s growth theory.The previous conclusions on corporate governance and firm risk-taking are often static and isolated, and fail to expand its further research. Basing on the background of American financial crisis, Chinese economic restructuring and the reform of state owned enterprises, this paper follows a logical clue of "antecedent--medium -- consequences", and makes a tentative research on the relationship between the firm risk-taking and the corporate growth. At last, it gives a new explanation about the affecting factors of the corporate growth.3. The paper reveals the indirectly affecting of CEO power, investor protection on the corporate growth, and announces the intermediary role of the firm risk-taking behavior on three.On the context of "CEO power, investor protection -- risk-taking -- corporate growth", this paper analyzes the antecedent and consequence of firm risk-taking in detail, and reveals the indirectly affecting of investor protection, CEO power on the corporate growth, and the intermediary role of the firm risk-taking behavior on three. The research not only refines the corporate’s growth theory to a certain extent, but also offers a reference for expanding the related researches in the field.4. The measure of firm risk-taking and investor protection index is improved.This paper measures the level of firm risk-taking from horizontal dispersion and longitudinal validation, and adjusts the two indicators on the average of industry and annual in initially. This method is more scientific and more persuasion to a great extent, which provides useful try for the following researches. Likewise, in the measure of the level of investor protection, we pick up some indicators:the implementation of laws and regulations, market process, the quality of information disclosure and the annual report, to get a comprehensive index that can reflects investor protection level in each area through factor analysis method. This method not only eliminates the problems that the existing index of investor protection is not comprehensive or uniform, but also provides certain reference to find out a suitable index of investor protection for the background of China’s legal system, the characteristics of securities market and the status of listing corporations.