Abstract
Using data for 1203 publicly listed firms in China during 1999–2002, this paper empirically investigates whether and to what extent state control affects managerial incentives, including managerial compensation and CEO turnover. The paper finds that CEO turnover is negatively related to both current and lagged firm performance as measured by ROA and RPE (Relative Performance Evaluation) for non‐state‐controlled firms, while insensitive to performance measures for state‐controlled firms. In addition, CEO compensation is positively related to firm performance, but state ownership and control weaken this positive relation. Moreover, state control reduces the effectiveness of internal governance mechanisms such as the board of directors and supervisory committee. Overall, empirical results in the paper indicate that state ownership and control weaken managerial incentives and internal monitoring among publicly listed firms in China.
Highlights
In recent decades, worldwide privatization has drawn considerable research interest and generated a large number of theoretical and empirical studies concerning ownership, incentives and firm performance1. Megginson and Netter (2001) and Djankov and Murrell (2002) provide comprehensive surveys of over 200 empirical studies on privatization in both developed and emerging market economies, most of which focus on the differential performance between state-owned enterprises (SOEs) and privately-owned firms
Numerous empirical studies on privatization find evidence that private ownership is associated with better firm performance than state ownership is
This study adds to the debate by providing empirical evidence on whether and to what extent state ownership and control affects managerial incentives among partially privatized firms in China
Summary
Worldwide privatization has drawn considerable research interest and generated a large number of theoretical and empirical studies concerning ownership, incentives and firm performance1. Megginson and Netter (2001) and Djankov and Murrell (2002) provide comprehensive surveys of over 200 empirical studies on privatization in both developed and emerging market economies, most of which focus on the differential performance between state-owned enterprises (SOEs) and privately-owned firms. Our study builds on and extends existing literature by providing a detailed examination of the relation between state control and managerial incentives using a large sample of partially privatized listed firms in China. The ongoing wage reforms in China transformed an egalitarian pay structure into an incentive-based compensation scheme through the adoption of “annual salary system”, which provides an excellent context to examine the relation between state control and managerial incentives. A competitive managerial labor market, where managers are rewarded or punished in response to market forces and firm performance, almost did not exist (Groves et al 1995) During this period, the central government collected all profits and distributed wages to workers at nationally determined pay rates. The unique ownership structure among China’s listed firms provides a good laboratory to test the impact of state control on managerial incentives during partial privatization. In addition to the largest SOEs, the annual salary system has been widely adopted by the publicly listed firms, most of which are partially privatized former SOEs. Fleisher and Wang (2003), Firth et al (2006) document the adoption of incentive pay in different types of Chinese enterprises
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