Research On The Corporate Governance Effect Of Executive Retention

In modern enterprises,management turnover is a natural and common phenomenon,but some executives still stay on the board as general directors.The rich experience of management and social capital enable the retained executives to have unique supervision and advice ability,which has positive governance effect on the enterprise;But at the same time,the retention of the former general managers on the board will damage the authority of the current management due to its potential influence in the past,which is not conducive to the performance of its management functions.Therefore,the retention of senior executives will have profound impact on corporate governance effect.However,few literatures had studied the corporate governance effect of executive retention,and there is still a lack of unified evidence on whether the impact of executive retention on corporate governance effect is improved or destroyed.In this paper,the Retained Executives are referred to these who once served as CEO in the company and become General directors on the board instead of leaving from the companies.The governance effect of this paper mainly includes,executive pay-for-performance sensitivity,corporate innovation,stock price synchronicity and government subsidies.The corporate governance effect of executive retention includes both internal governance effect and external governance effect.Executive pay-for-performance sensitivity,corporate innovation internal governance effects,stock price synchronicity and government subsidy are parts of external governance effects.Specifically,on the one hand,for the effect of corporate internal governance:(1)Due to the serious agency problem between shareholders and the management,in order to supervise the management effectively and reduce moral hazard and adverse selection caused by information asymmetry,the board of directors usually adopts the compensation contract that makes the management compensation closely related to the company’s performance when formulating and reviewing the executive compensation(Holmstrom,1979),which can improve the level of corporate governance;(2)Innovation is an important cornerstone for an economy to maintain sustained and stable growth.Innovation activities as a major strategy of an enterprise usually need to be approved by the board,it’s mean that the internal governance mechanism of an enterprisewhich can influence corporate innovation,and the former managing director,no doubt have an important influence.On the other hand,in terms of external governance effect,(1)Stock price synchronization reflects stock information content negatively,that is,the higher the stock price characteristic information content,the lower the stock price synchronization.Enterprises with excellent corporate governance mechanism will pay more attention to corporate information disclosure,proactively reduce information asymmetry,and integrate more company-specific information into stock price.As the core of corporate governance,the board of directors plays the role of advising and supervising the preparation of financial reports and disclosure of corporate information directly.A reasonable and effective board of governance mechanism can,to a certain extent,urge the management authorities to disclose more corporate characteristic information and improve the content of stock price information.As a member of the board of directors,the personal characteristics of directors also affect the board governance effect.(2)The effective corporate governance can make the enterprise management transparency,openness,will enhance the public image of enterprise,good company on the corporate governance mechanism and the use of more efficient,more influence on the local economy,it is easier to significantly improve the local economy quickly and made outstanding contributions to the local economy,The government may prefer the enterprises with strong market competitiveness when choosing the target of subsidy.Based on these,the governance effect of this paper mainly includes pay-forperformance sensitivity,corporate innovation,stock price synchronization and government subsidies.The key varible of former general managers in the board of directors of listed companies(the executive retention)are manually sorted from the list of board members and senior executives and their resumes disclosed in the company’s regular report and prospectus.Taking A-share listed companies in Shanghai and Shenzhen from 2003 to 2018 as samples,this paper investigates the corporate governance effect of executive retention from four parts:compensation performance sensitivity,enterprise innovation,stock price synchronization and government subsidies.The main contents and conclusions are as follows:First,through the perspective of executive pay-for-performance sensitivity,the author studies the corporate governance effect of executive retention.It is found that executive retention is significantly negatively correlated with executive pay-forperformance sensitivity,that is,executive retention will reduce executive pay-forperformance.In order to ensure the robustness of the results,a series of robustness tests are conducted.The results persisted after controlling for firm fixed effects,changing the measures of dependent variable,changing the measures of independent variable,using propensity score matching,and Heckman two-stage model.Further research shows th at the negative impact of executive retention on executive pay-forperformance sensitivity is more profound when the industry competition is lower,in non-state-owned enterprises and the board independence is lower.Second,through the perspective of enterprise innovation,the author studies the corporate governance effect of executive retention.It is found that executive retention will reduce the innovation level of the company.In order to ensure the robustness of the results,a series of robustness tests are conducted.The results persisted after changing the regression method,changing the dependent variable,controlling for firm fixed effects,using the propensity score matching method,and Heckman two-stage model.Further research shows that when the industry competition is lower and in the state-owned enterprises and the independence of the board is lower,the inhibition of executive retention on enterprise innovation is more profound.Third,through the perspective of stock price synchronization,the author studies the corporate governance effect of executive retention.It is found that executive retention will reduce the information content of stock price and improve the synchronization of stock price.In order to ensure the robustness of the results,a series of robustness tests are conducted.The results persisted after changing the measure of stock price synchronicity,controlling for firm fixed effects,using propensity score matching and the Heckman two-stage model.Further research shows that the positive impact of executive retention on stock price synchronization is more obvious if the industry competition is lower and in the non-state-owned enterprises and if the independence of the board is lower.Fourth,through the perspective of government subsidies,the author investigates the corporate governance effect of executive retention.It is found that executive retention has a negative impact on the acquisition of government subsidies.In order to ensure the robustness of the results,a series of robustness tests are conducted.The results persisted after changing the way of government subsidies were measured,controlling for firm fixed effects,using propensity score matching and the Heckman two-stage model.Further research also shows that the negative impact of executive retention on government subsidies is more obvious when the industry competition is higher,in the state-owned enterprises and if the independence of the board is lower.The overall study finds that executive retention reduces executive pay-forperformance sensitivity,reduces firm innovation,improves stock price synchronization,and reduces the access of government subsidies.From the research of this paper,it can be seen that the executive retention plays a negative corporate governance effect,and we should strengthen the research on the corporate governance effect of executive retention.When studying the governance effect of executive retention,we should consider the possible influence of board independence,corporate property rights and the competition of industry.At the same time,as an institutional arrangement of the board of directors,from the perspective of corporate governance,regulators can issue relevant regulations to properly regulate the retention behavior of corporate executives.