Executive Turnover and Firm Performance in China

Abstract

Executive turnover and its link to firm performance can provide a crucial measure of how effectively a firm solves the two sets of principal-agent problems: (a) the diverging interests between top management and shareholders, which may result in managerial entrenchment; and (b) the diverging interests between controlling shareholders and minority shareholders, which may lead to the expropriation of the latter by the former or “tunneling,” as referred to in the literature. Tying the personal fortune of top executives to the firm’s performance aligns the interests of shareholders and those of management. It also breaks up the “insider” alliance between the controlling shareholder and management, thereby helping protect the interests of minority shareholders. Although there is a large literature on executive turnover in Western firms, research on executive turnover in non-Western firms is limited, and this paper is the only one on China. A closer look at the executive turnoverperformance link in China (one of the two major internal discipline mechanisms in corporate governance) is particularly relevant, since effective markets for corporate control are missing in China, the largest developing and transitional economy in the world. Furthermore, China is an interesting case because both types of agency problems are acute due to poorly defined property rights and weak investor protection, which result largely from its command economy legacy.