Politically Connected CEOs,Corporate Governance,and the Post‐IPO Performance of China's Partially Privatized Firms

The authors' study provides suggestive evidence of the negative effects of politically connected CEOs on the corporate performance and governance of publicly listed companies in China. Newly listed Chinese companies with politically connected CEOs are more likely to have boards that are populated by current or former government bureaucrats, and that generally exhibit low degrees of professionalism, as indicated by fewer directors with relevant professional backgrounds. At the same time, the operating and stock‐return performance of such firms has failed to match that of their politically unconnected counterparts. Thus, the authors' study provides more support for the argument that bureaucrats and politicians extract resources from listed SOEs under their control to fulfill objectives that are not consistent with firm value maximization. Expressed in more general terms, the main finding of the study is that the constraints on property rights faced by Chinese SOEs—namely the non‐transferability of state ownership and the right of the government to appoint CEOs—appear to have significantly negative effects on firm performance as well as board professionalism and governance. Removing these constraints will likely have to be a critical part of any future reforms that aim to improve the productivity of listed Chinese companies.     

Politically connected CEOs,corporate governance,and Post-IPO performance of China's newly partially privatized firms

Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO's political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds.     

Corporate performance and CEO compensation in China

This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firms have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to increases in stockholders' wealth or increases in profitability. However the pay–performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems.     

Investment efficiency,state-owned enterprises and privatisation: Evidence from Viet Nam in Transition

Our research firstly tests the difference in investment efficiency between state-owned enterprises (SOEs) and private firms and secondly evaluates the effect of privatisation and equitisation policies on the investment efficiency of former state owned enterprises (SOEs). We use a novel dataset from Viet Nam which covers large and non-listed SMEs across construction, manufacturing, and service sectors. Our methodology uses a structural model to test the relationship between Tobin's Q and capital spending. While evident differences in investment efficiency are found across heterogeneous groups of private firms (size, industry, financially constrained and location), we find no evidence of investment spending being linked to marginal returns by SOEs across all sectors and size classes. However, former SOEs that have been privatised and equitized with a minority state shareholding display positive links between Q and investment. In fact, the link is stronger for these firms than for private firms. Differences are also evident across size and sector highlighting that the method of divestment chosen by government shareholders has a differential impact on efficiency across groups of firms and industries.     

CEO's Religious Affiliation and Managerial Conservatism

We investigate whether managers' religious affiliations affect corporate decisions. We hand collect data on the religious affiliations of chief executive officers (CEOs) and find that firms with Catholic CEOs have less leverage, issue debt less often, increase business and geographic diversification, and invest less than firms with Protestant CEOs. We also find that the decisions of Catholic CEOs are associated with lower firm value. These corporate actions are also reflected in the CEOs’ personal decisions, such as owning fewer company stocks and playing less risky sports.     

Regional Unemployment and the Restructuring of Distressed State-owned Enterprises: Evidence from China

Abstract:

Using Chinese listed companies as the sample, we investigate the effects and corresponding consequences of regional unemployment rates on the restructuring behavior of distressed state-owned enterprises (SOEs). We find that layoffs and asset downsizing of local SOEs will be limited greatly when the unemployment rates of the areas where SOEs are located are high, even though these firms are already in distress. Additional evidence shows that this kind of limitation causes these firms to show a long-term decline in performance. The CEOs of these firms, however, are not easily dismissed after the distress. These results provide empirical support for the “grabbing hand“ theory.     

What's in an education? Implications of CEO education for bank performance

Exploiting a unique hand-built dataset, this paper finds that CEO educational attainment, both level and quality, matters for bank performance. We offer robust evidence that banks led by CEOs with MBAs outperform their peers. Such CEOs improve performance when compensation structures are geared towards greater risk-taking incentives, and when banks follow riskier or more innovative business models. Our findings suggest that management education delivers skills enabling CEOs to manage increasingly larger and complex banking firms and achieve successful performance outcomes.     

Financial Crisis,Politically Connected CEOs,and the Performance of State-Owned Enterprises: Evidence from Korea

This study examines under specific situations the performance of state-owned enterprises (SOEs) from two points of view—business performance and public performance. We find that SOEs with a politically connected CEO perform well even during a financial crisis as the SOEs are able to obtain more favorable treatment. However, the results imply that politically connected CEOs perform poorly when government subsidies are excluded as they may lack the skills for successful management. The results also confirm that SOEs encourage more corporate social responsibility (CSR) activities during a financial crisis in an effort to gain legitimacy by demonstrating that they are committed to social responsibility. However, politically connected CEOs have a negative effect on CSR performance during a financial crisis.     

CEO Power and Firm Performance under Pressure

Are powerful chief executive officers (CEOs) more effective in responding to pressure from the economic environment? Concentrating decision‐making power may facilitate rapid decision making; however, the quality of decision making may be compromised, with severe consequences for the firm if a powerful CEO is less likely to receive independent advice or to have her decisions scrutinized. We empirically investigate the performance of firms with powerful CEOs when industry conditions deteriorate. We focus on industry downturns as these represent an exogenous shock to a firm's environment and on settings in which CEO power and access to quality information is likely more consequential: innovative firms, firms with relatively little related‐industry board expertise, firms operating in competitive industries, and firms operating in industries characterized by relatively greater managerial discretion. In each of these settings we find powerful CEOs perform significantly worse than other CEOs, suggesting contexts in which centralized decision making is potentially of greater concern.     

CEO Pay and Corporate Governance in the U.S.: Perceptions,Facts, and Challenges

This article brings a broad range of statistical studies and evidence to bear on three common perceptions about the CEO compensation and governance of U.S. public companies: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially during the 1990s, it has declined since then— by more than 30%—from peak levels that were reached around 2000. Moreover, when viewed relative to corporate net income or profits, CEO pay levels at S&P 500 companies are the lowest they've been in the last 20 years. And the ratio of large‐company CEO pay to firm market value is roughly similar to its level in the late 1970s, and lower than the levels that prevailed before the 1960s. What's more, in studies that begin with the late '70s, private company executives have seen their pay increase by at least as much as public companies. And when set against the compensation of other highly paid groups, today's levels of CEO pay, although somewhat above their long‐term historical average, are about the same as their average levels in the early 1990s. At the same time, the pay of U.S. CEOs appears to be reasonably highly correlated with corporate performance. As evidence, the author cites a 2010 study reporting that, over the period 1992 to 2005, companies with CEOs in the top quintile (top 20%) of realized pay in any given year had generated stock returns that were 60% higher than the average companies in their industries over the previous three years. Conversely, companies with CEOs in the bottom quintile of realized pay underperformed their industries by almost 20% in the previous three years. And along with lower pay, the CEOs of poorly performing companies in the 2000s faced a significant increase in the likelihood of dismissal by their own boards. When viewed together, these findings suggest that corporate boards have done a reasonably good job of overseeing CEO pay, and that factors such as technological advances and increased scale have played meaningful roles in driving the pay of both CEOs and others with top incomes—people who are assumed to have comparable skills, experience, and opportunities. If one wants to use increases in CEO pay as evidence of managerial power or “board capture,” one also has to explain why the other professional groups have experienced similar, or even higher, growth in pay. A more straightforward interpretation of the evidence reviewed in this article is that the market for talent has driven a meaningful portion of the increase in pay at the top. Consistent with this conclusion, top executive pay policies at roughly 97% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd‐Frank mandated “Say‐on‐Pay” votes in 2011 and 2012, the first two years the measure was in force.     

Corruption,growth, and governance: Private vs. state-owned firms in Vietnam

We provide a firm-level analysis of the relation between corruption and growth for private firms and state-owned enterprises (SOEs) in Vietnam. We obtain three different measures of the perceived corruption severity from a 2005 survey among 741 private firms and 133 SOEs. We find that corruption hampers the growth of Vietnam’s private sector, but is not detrimental for growth in the state sector. We document significant differences in the corruption severity across 24 provinces in Vietnam that can be explained by the quality of provincial public governance (such as the costs of new business entry, land access, and private sector development policies). Our results suggest that corruption may harm economic growth because it favors the state sector at the expense of the private sector and that improving the quality of local public governance can help to mitigate corruption and stimulate economic growth.     

Political considerations in the decision of Chinese SOEs to list in Hong Kong

This paper investigates why Chinese state-owned enterprises (SOEs) with strong political connections (i.e., politically connected firms) are more likely to list overseas than non-politically connected firms. We find that connected firms' post-overseas listing performance is worse than that of non-connected firms. This evidence suggests that connected firms' managers list their firms overseas for private (political) benefits. Consistent with this private benefits explanation, we further find that connected firms' managers are more likely to receive political media coverage or a promotion to a senior government position subsequent to overseas listing than domestic listing.     

Overconfidence and tax avoidance: The role of CEO and CFO interaction

We investigate how overconfident CEOs and CFOs may interact to influence firms’ tax avoidance. We adopt an equity measure to capture overconfident CEOs and CFOs and utilize multiple measures to identify companies’ tax-avoidance activities. We document that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions in regard to tax avoidance. Specifically, we find that companies are more likely to engage in tax-avoidance activities when they have both overconfident CEOs and overconfident CFOs, compared with companies that have other combinations of CEO/CFO overconfidence (e.g., an overconfident CEO with a non-overconfident CFO), which is consistent with the False Consensus Effect Theory. Our study helps investors, regulators, and policymakers understand companies’ decision-making processes with regard to tax avoidance.     

Ownership–efficiency relationship and the measurement selection bias

This study analyses the bias in the selection of performance measures for ownership comparisons, which depends on the specific objectives of the firms being compared. Our sample includes 13 Canadian state‐owned enterprises (SOEs), commercialized and/or privatized between 1976 and 2001. To replace profitability measures and reduce biases, we propose the use of technical efficiency, which provides for SOEs’ specificities. Overall, the results clearly support the view that privatization has no impact on a firm's technical efficiency, the only positive impact being related to a change in the objectives of the firm while using profitability measures. The results of this study raise the question of the validity of comparisons between SOEs and private firms when using profitability indicators. The potential bias in favour of the private firms contributes to a misleading image of the public sector being presented as inferior and inefficient. The use of more sophisticated measures, such as data envelopment analysis, suggests conflicting conclusions. This study also casts doubt on the legitimacy of the privatization program initiated around the world and more specifically in Canada in which the main justification for such a reform has been to increase the performance of SOEs.     

Which of these people is your future CEO?

Americans have long believed that U.S. military officers--trained for high-stakes positions, resilience, and mental agility--make excellent CEOs. That belief is sound, but the authors' analysis of the performance of 45 companies led by CEOs with military experience revealed differences in how the branches (Army, Navy, Air Force, Marine Corps) prepare leaders for business. Those differences reflect the trade-off between flexibility and process that each branch of the armed services must make. Army and Marine Corps officers operate in an inherently uncertain environment. They define the mission but then give subordinates the flexibility to adjust to realities on the ground. This leadership experience tends to turn out business executives who excel in small firms, where they can set a goal and then empower others to work toward it. Navy and Air Force officers, who operate expensive, complex systems such as submarines and aircraft carriers, are trained to follow processes to the letter, because even small deviations can have large consequences. In corporations, these leaders excel in regulated industries and in firms that take a process approach to innovation. The larger lesson that the military can offer the business world is that fit matters. Different circumstances demand different leadership skills. Hire the person who fits the job.     

Does corporate diversification by business groups create value? Evidence from Korean chaebols

We investigate the valuation effects of diversification activities by Korean business groups known as chaebols. Employing an extensive dataset of Korean firms and accounting for the endogeneity problem associated with firms' diversification decisions, we offer reconciling evidence that unrelated diversification by Korean firms erodes firm value, but their related diversification does not decrease firm value. Undocumented in the existing literature, we further provide new evidence that a firm's affiliation to a large business group amplifies the valuation effect of firm-level diversification, such that the non-negative or weak positive valuation effect of related diversification is stronger for large business group firms. These findings are supportive of the notion that the unique characteristics of large business group firms such as stronger internal factor markets enable these firms to take advantage of the synergic benefits associated with related diversification. Our findings are robust to different model and sample specifications.     

Can CEO dismissals be proactive?

We find significant variation in the prior stock returns of firms that dismiss their CEOs between 1996 and 2008. 49% of firms that dismiss their CEOs do so in the absence of negative industry-adjusted stock returns prior to dismissal (37% dismiss in the absence of negative raw returns). We find evidence for two reasons why boards may dismiss CEOs early, i.e., in the absence of significant poor prior stock performance. First, we find that early dismissals are more likely to be associated with corporate scandals, suggesting that CEOs that are found to engage in unethical or illegal activities are dismissed although their actions may not have a significant adverse impact on firm value. Second, we find support for the argument that early dismissals are proactive actions by boards to dismiss low ability CEOs. We find that firms with more equity-based compensation for directors and higher independent director ownership are more likely to dismiss their CEOs early. Boards with strong incentives are more likely to be proactive and act on their private information about the CEO than boards with poor incentives. Early dismissal firms experience a short-lived decline in operating performance around the date of CEO dismissal, and their operating performance recovers immediately after the CEO is replaced. On the other hand, the operating performance of late dismissal firms declines significantly prior to dismissal and improves substantially after dismissal. We also find that CEOs that are dismissed early are not more likely to find new CEO positions than CEOs that are dismissed late, supporting the idea that early dismissal CEOs may not have different ability than late dismissal CEOs.     

Political connections,tax benefits and firm performance: Evidence from China

This paper investigates the different effects of political connections on the firm performance of state-owned enterprises (SOEs) and privately owned enterprises. Using data on Chinese listed firms from 1999 to 2007, we find that private firms with politically connected managers outperform those without such managers, whereas local SOEs with connected managers underperform those without such managers. Moreover, we find that private firms with politically connected managers enjoy tax benefits, whereas local SOEs with politically connected managers are prone to more severe over-investment problems. Our study reconciles the mixed findings of previous studies on the effect of political connections on firm performance.     

The information transfer effects of political connections on mitigating policy uncertainty: Evidence from China

A key aspect of Chinese-style institutions is that the growth of the economy can be severely restricted by the adjustment and implementation of policy, leading to serious uncertainty in business practices. This paper investigates whether political connections help private firms obtain policy information ahead of public disclosure that would allow them to hedge against policy uncertainty. Using the quarterly data on non-financial private listed companies over 2007:Q1–2017:Q4, we find that the negative effect of policy uncertainty on fixed-asset investment is lower in politically connected firms than in non-connected firms, especially in industries with low asset reversibility and regions with a high degree of marketization. Further, a positive mitigation of policy uncertainty exists in firms whose top executives served as officials rather than deputies, and higher administrative as well as finance-related political connections show more information advantage. In addition, robust evidence is provided that controls the impacts of political connections on financing constraints, business performance and policy burdens, overcoming potential endogeneity, and the cash-holdings perspective. Our findings suggest that political connections are conducive to mitigate information asymmetry between private firms and policymakers in China.     

Financing constraints and share pledges: Evidence from the share pledge reform in China

Financing constraints are important to triggering controlling shareholders' share pledges. However, the related literature faces two major challenges: the endogeneity problem and the lack of direct evidence of why and how individual share pledges can ease corporate financing constraints. Based on China's Share Pledge Reform (SPR) in Q4 2012 and the phenomenon that private firms face discrimination when obtaining bank loans, this paper studies the impact of financing constraints on share pledging behavior and its mechanisms by building a difference-in-differences (DID) model. The SPR makes it more convenient for shareholders to raise money through share pledges, and shareholders of private firms facing stronger financing constraints are more vulnerable to this reform than are state-owned enterprises (SOEs). After the SPR, the probability of share pledging by controlling shareholders of private firms is approximately 23.04% higher than that of controlling shareholders of SOEs, and the pledge ratio is approximately 16.53% higher. Further tests reveal that, after the SPR, controlling shareholders of private firms are more inclined than those of SOEs to provide loans to the company to alleviate its financing constraints. Heterogeneity tests further corroborate the finding that this effect is more significant in private firms that are smaller and do not have shareholders of banking and institutional firms among their top ten shareholders.