Monitoring the Type I Agency Problem or the Type II Agency Problem? Directors Appointed by Non-State Shareholders and the CEO Turnover–Performance Sensitivity

Abstract

ABSTRACT In China’s state-owned listed companies, there exists the type I agency problem primarily caused by owners’ absence and insiders’ control, as well as the type II agency problem of the infringement on the interests of small and medium-sized shareholders by the largest shareholders. Our research examines the relationship between directors appointed by non-state shareholders and the CEO turnover–performance sensitivity, so as to clarify whether directors appointed by non-state shareholders are more inclined to monitor the type I agency problem or the type II agency problem. Using the sample of state-owned listed companies from 2006 to 2016, we find that directors appointed by non-state shareholders are more likely to monitor the type II agency problem, as demonstrated by significantly reducing the CEO turnover–performance sensitivity. Our research also finds that directors appointed by non-state shareholders play more important role in reducing the CEO turnover–performance sensitivity when the company has a high degree of separation of ownership and control, operates in the non-regulated industry, and has a large number of following security analysts. Besides, we perform propensity score matching, instrumental variable regressions, placebo test and several robustness checks to address possible endogeneity concerns and measurement errors.