Endogenous And Dynamic Relationship Between Internal Corporate Governance And Performance

The ’financial tsunami’ which happened in2007-2008is the greatest economic crisis sincethe Great Depression period, since the1930s. The stock price fell tempestuously. Themain U.S. banks need emergency assistance or even bankruptcy. Some scholars believethat the financial crisis is a result of a series of corporate governance oversight failure,especially in risk management failures and manager remuneration to encourage holdingexcess risk. Corporate governance standing under the spotlight again is concerned by theacademics and businessmen.The scholars research the relationship between corporate internal governance andperformance for a long time. However, these research’s findings are not consistent, evencontradictory. The reason is that a large number of studies do not take into account theendogenous of corporate governance, or ignored hysteresis quality of the CorporateGovernance and Performance. This paper attempts to control endogenous and dynamicnature, to research the internal governance’s three aspects： executive incentive,ownership structure and board structure, to more accurate determination of therelationship between corporate governance and company performance. We try to provideeffective support for China’s enterprise reform. The empirical results show that thedynamic endogenous nature does affect the relationship between internal governance andperformance.Executive incentive include explicit and implicit incentives, the empirical results showthat after control the endogenous dynamic nature, the explicit incentive and performancehave insignificantly associate, but the implicit incentive and performance weresignificantly associate. Both prior period and current period implicit incentive are negativeeffect with performance. This shows that implicit incentive (in-service consumption)indeed damage the value of the company. Monetary remuneration of executive incentivewas not significant, did not promote the convergence of the interests of operators andowners. The main reason is that professional managers market just started, and wagecontrols. So it should accelerate the professional manager market development, andcontrol in-service consumption. Then management’s interests will same of company’sinterests. The shareholding structure including ownership concentration and equity balance degree,empirical results show that after control the endogenous dynamic nature, ownershipconcentration and equity balance degree have no significant relationship with performance.This certifies the dynamic endogenous nature does affect the relationship betweenownership structure and performance. The phenomenon of large shareholders holding iswidespread in China. The average first largest shareholder’s ratio is nearly40percent. Sothe company’s interests are often reflected the interests of large shareholders. Ownershipconcentration does not increase the value of the company.Board structure has two ways to measure： board size and proportion of independentdirectors. The empirical results show that after control endogenous dynamic nature, both ecurrent board size and pre-board-size have no significant relationship with performance.The size of the board does not affect corporate performance in China. The main reason isthat the largest shareholder of corporate average has38.87%shares. Large shareholdercontrol the board is widespread. So, the board just reflects large shareholder’s interests.Board size change does not affect corporate performance. The prior proportion ofindependent directors has significant negative relationship with performance, whilecurrent proportion of independent directors has no significant relation with performance.The independent director system was required to establish by government at2001. Afterseveral years’ developments, the independent director system began to play its due role.