Corporate Governance Study Under Government Control: Evidence From CEO Turnover In China's Listed Firms

The separation of ownership and control leads to the emergence of principal agency problems in modern corporations.In order to reduce the agency costs caused by the divergence of interests between principal(shareholders) and agent(managers), a substantial body of literature has examined the effectiveness of various mechanisms for enhancing the effectiveness of CEO monitoring.And it is also a key indicator of the corporate governance's efficiency that whether CEO turnover decision is linked to his operation performance or not.Thus,this paper try to investigate the current status and efficiency of corporate governance from the view of CEO turnover in China's listed firm under the institutional background of government control.As we know,China's stock market comes to existence within the transitional economy and its initial objective is to serve the reform of state-owned firm and to relieve their financial burden during this process.TO keep the government's dominance position in these listed firms,there are huge of non-tradable shares owned by the government(before the split-share reform).Hence,the incentives and behaviors of government will definitely have a strong impact on those listed firms they controlled,which will further have influence on each aspect of the principal agent relationship.Due to the phenonmena of absence of owner as principal,there will be deficient incentive of the state shareholder to monitor its agent.And this kind of incentive will bring on an asymmetry structure or even adverse structure(such as soft budget phenomenon),which can further lead to the "insider control" problem.In the meantime,those state-controlled listed firms will also have multi-objectives when their shareholders(government) bear with these multi-objectives(such as increasing the employment level,implementing some special economic strategy and maintaining the stabilization of the society) naturally.Consequently,these listed firms will not follow the market principle all the time and might sometimes do harm to the market value of themselves,while the principal agent relationship in this situation is much more complicated than that in private-controlled firms.In view of the above background,based on the CEO turnover data in China's listed firms from year 1995 to 2003,this study conducts an empirical research on the corporate governance problem under the government control from the following three issues:the effectiveness of creditor monitoring,the relation between board leadership structure and corporate governance efficiency with different financial performance and the comparison of different mechanism between state-controlled and private-controlled listed firms with multi-objective functions.The results show that:Firstly,bank as a creditor does not behave its supposed role to lessen the "insider control" problem and even induces the soft budget problem,which depressed the effectiveness of corporate governance in loss-making listed firms.However,the provider of trade credit which is another important financing source improves the corporate govemance efficiency when it increases the probability of CEO turnover in poorly performed firms because of its advantage on the monitoring incentive and ability.Secondly,state shareholders or board of directors have different incentives at different level to oversee CEO under the institutional background of government control when the state-controlled listed firms are experiencing different performance status,which then lead to different nature of forced CEO turnover.Accordingly, there will be different relation between board leadership structure and CEO tumover mechanism under different performance status and the impact of such relation on the efficiency of corporate governance will also be different.Because it is very difficult to find a scapegoat,state shareholders have greater incentive to discipline poorly performing CEOs when the CEO and chairperson is the same person when these firms are making financial losses.There will be severe principal agent problems in the marginal performing firms because the vested position of chairman and CEO into one person can lead to less effective monitoring incentives from board of directors to oversee CEO,which may do harm to the corporate govemance efficiency.However, CEO duality may positively contribute to the corporate governance of out-performing firms by protecting well performing CEOs from being replaced with non-performance reasons,which can be regarded as an indicator of the efficient corporate governance.Thirdly,there are great differences on the governance mechanism and objective functions between state-controlled and private-controlled listed firms.Some social responsibilities are assumed on the state-controlled listed firms due to govemment's intervention.These state-controlled listed firms will exhibit some non-profit-seeking behavior and might go against the profit-maximization principle in some situation. For state-controlled listed firms,asset turnover is a very important index in the performance evaluation mechanism.Contrary to asset turnover,profit margin is not a key measure of CEO's performance due to the existence of non-profit objectives and lacking of incentive to control the operational cost.Moreover,state shareholders tend to monitor CEOs and evaluate their performance basing on asset turnover when there is an indication of non-profit objective such as over-employment or opportunistic behavior,while this is not the case for those private-controlled listed firms.Actually, the pursuit of higher profit margin,which means the persuit of cost control and operational efficiency,is the main criteria for private-controlled listed firms to assess CEOs' performance.Overall,the government control can be regarded as the root of the failure of some traditional corporate governance mechanism in China's listed firms.Hence,the special background of government control should be placed into the analysis framework whenever we want to study the corporate governance problem in China's listed firms.Thus,some conclusive words are then presented in the final section.