CEO Turnover, Firm Performance, and Corporate Governance in Chinese Listed Firms

Abstract

Using comprehensive financial and accounting data on China's listed firms from 1998 to 2002, augmented by unique data on CEO turnover, ownership structure and board characteristics, we estimate Logit models of CEO turnover and find that: (i) even if the firm is listed in Stock Exchanges, there is no significant and negative link between CEO turnover and firm performance unless the listing is accompanied by an ownership change from state to private; (ii) the presence of a large controlling shareholder makes CEO turnover more sensitive to firm performance; (iii) the appointment of independent directors enhances turnover-performance sensitivities; (iv) CEO turnover-performance sensitivities are weaker for listed firms with CEOs who also hold positions in the controlling shareholders; and (v) firm performance will improve significantly after the replacement of the CEO and the improvement will be greater for privately controlled firms than for state controlled firms. These findings have important implications for China's stock market development and SOE reform as well as more generally the law and finance approach to corporate governance. Consistent with the law and finance approach to corporate governance, the wholesale change of ownership and control from the state to private individuals and firms is found to be the most consistent and significant contributor to stronger CEO turnover-performance link and hence the higher quality of corporate governance. The positive effects of higher independence of board members on turnover-performance link are also consistent with the weak investor protection theory.