Study On Political Connection, CEO Turnover And Capital Structure Optimizing Adjustment

The managerial models of capital structure highlight the roles of managers incapital structure decisions. It is difficult to make managers to choose the capitalstrucuture to restrict themselves in the environment of asymmetry information andincomplete contract. Managerial entrenchment theory considers that managers willadjust capital structure to strengthen their position and concentrate on perusing theirown utility while confronting with the incentive and constraint governance mechanisms.If managers are fired, it will make them to lose all the benefits of position, bear thesearch costs of new work, which eventally damages their professional career. It willexhibit the managerial entrenchment perfectly. Based on the background that the capitalstructure adjustment speed is slow in China’s listed companies, this thesis explores therelationship of political connection, CEO turnover and capital structure optimizingadjustment from the aspect of managerial entrenchment.The thesis firstly reviews the related literature of political connection, CEOturnover and capital structure optimizing adjustment. Based on the hypotheses ofgovernmental helping hand and grabbing hand, control right theory, managerial modelsof capital structure, upper echelon theory, behavioral consistency hypothesis andmanagerial entrenchment theory, combining with the transitional economy backgroundof China, we refine the theoretical framework of political connection, CEO turnover,and capital structure optimizing adjustment. Then taking advantage of the technique ofpanel logistic regression, GMM of dynamic panel data, moderator effect analysis andmediator effect analysis, we explore the impact of political connection on CEO turnoverand CEO turnover performance sensitivity, the impact of CEO turnover on the capitalstructure adjustment speed, the impact of political connection on the capital structureadjustment speed and the conduction of political connection on capital structureadjustment speed through CEO turnover.Empirical results show as follows. Managerial political connection reduces thepossibility of CEO turnover and weakens the sensitivity of CEO turnover to firm’sperformance, which indicates that political connection strengthen the stabilization oftheir positon. CEO turnover increases the adjustment speed of capital structure, whichsuggests that CEO turnover can reduce the extent of managerial entrenchment of thesuccessors and drive the successors to optimize the firm’s capital structure. Whileweakening the governance function, managerial official political connection go against adjusting the capital structure. At the same time, the resources effect is dominant forthe delegate political connection, so it will benefit the capital structure optimizingadjustment. In the end, based on the above findings, we propose the policies ofcanceling the administrative appointment of executives of state-owned firms, selectingthe appropriate political connection policies, perfecting the mechanisms of takeover andbankruptcy and clarifying the boundary between government and market.This thesis explores the influence of mangerial political connection and CEOturnover on capital structure optimizing adjustment based on the transitional economyfrom the aspect of managerial entrenchment, which supplements the literature of upperechelon theory and hypothesis of behavior consistency. It also enriches the theory ofmanagerial entrenchment and the managerial models of capital structure. The resultsalso provide evidences for selecting appropriate managers, perfecting the corporategovernance mechanisms and optimizing the decisions of capital strucuture.