Entrenched Board in New Public Firms: An Empirical Study of Chinese IPOs

Abstract

This study empirically investigates the impact of managerial entrenchment on firm financial performance of Chinese firms initial public offerings (IPOs). Using 142 firms listed in the Shenzhen Stock Exchange (SZSE), which was collected from the Guotaian Research Service Center (GTA-RSC) databases, this study uses two proxies to measure firm performance and three proxies to measure managerial entrenchment. The two proxies for firm performance are Tobins’ Q and return on assets (ROA), and the three proxies for managerial entrenchment are entrenchment 1, entrenchment 2, and entrenchment 3. These three entrenchment proxies are derived from the principal component analysis (PCA). Though previous studies of managerial entrenchment and firm performance variables suffer from endogeneity, with respect to the corporate governance it is unclear as to which variables are endogenous and which are exogenous. This study confirms that the data are linear and no endogeneity issue should be address in this study, but only heteroskedasticity, non-normality for Tobins’ Q are a problem, therefore, the regression method employed for Tobins’ Q is the generalised least square (GLS) and the ordinary least square (OLS) between estimators for ROA. The regression result for Tobins’ Q reveals that managerial entrenchment is negatively impact on firm performance. The results are in contradiction to the stewardship theory for new firms whereas the managerial entrenchment for new firms is positive. Furthermore, only one entrenchment proxy yields a significant coefficient. In conclusion, the negative results of entrenchment proxies were caused by the different institutional structures and legal systems which are the Chinese corporations that are still largely owned and controlled by a state and hence the centralised state controlled was responsible for all managerial actions.