Changes in CEO compensation structure and the impact on firm performance following CEO turnover

We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.

Rookie directors and firm performance: Evidence from China

This paper examines the benefits and costs associated with rookie independent directors (RIDs) in Chinese public companies from 2008 to 2014. We find that RIDs attend more board meetings. Boards with more RIDs tunnel less to controlling shareholders, suggesting that RIDs are efficient monitors. However, in state-owned firms, the presence of RIDs is negatively associated with investment efficiency, suggesting a potential cost of appointing RIDs. Overall, firms with more RIDs have higher operating performance, especially when tunneling is a more common issue, when board experience is less important and when monitoring costs are relatively low.     

Executive compensation in business groups: Evidence from China

This paper examines executive compensation in the subsidiaries of business groups in China. Analyzing a sample of China business groups(the so-called'Xi Zu Ji T...     

Mutual funds’ ownership and firm performance: Evidence from China

Mutual funds have emerged and rapidly developed since 2000 in China. This study tests empirically the impact of mutual funds’ ownership on firm performance in China, using a large sample for the period of 2001–2005. We find that equity ownership by mutual funds has a positive effect on firm performance. The result is robust to several measures of firm performance and various estimations. Our finding supports recent regulatory efforts in China to promote mutual funds as a corporate governance mechanism and suggests that pooling diffuse minority interests of individual shareholders who are prone to free-rider problems via mutual funds is beneficial.     

CEO compensation,director compensation,and firm performance: Evidence of cronyism?

We model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. After controlling for monitoring proxies, we find a significant positive relationship between CEO and director compensation. We hypothesize that this relationship could be due to unobserved firm complexity (omitted variables), and/or to excess compensation of directors and managers. We also find evidence that excess compensation (both director and CEO) is associated with firm underperformance. We therefore conclude that the evidence is consistent with excessive compensation due to mutual back scratching or cronyism. The evidence suggests that excessive compensation has an effect on firm performance that is independent of the poor governance variables discussed by previous studies.     

CEO compensation structure and firm performance

The objectives of our study are to estimate a model of ‘efficient’ compensation structure based on firm characteristics and test the performance consequences of deviation from the efficient compensation structure. Our results are based on 3503 firm years for the period from 1999 to 2005. The results suggest that firms whose CEOs receive compensation inconsistent with their firm characteristics have a lower performance compared to those firms whose CEOs’ compensation is consistent with their firms’ characteristics. Our measure of performance is based on both accounting and market‐based performance measures. Overall, our study provides some important new insights into the links between CEO compensation structure and firm performance.     

Corporate governance and incentives in German companies: Evidence from top executive turnover and firm performance

This paper examines executive turnover—both for management and supervisory boards—and its relation to firm performance in the largest companies in Germany in the 1980s. Turnover of the management board increases significantly with poor stock performance and particularly poor (i.e. negative) earnings, but is unrelated to sales growth and earnings growth. These turnover-performance relations do not vary with measures of stock ownership and bank voting power. Supervisory board appointments and turnover also increase with poor stock performance, but are unrelated to other measures of performance.     

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.     

Top management turnover,firm performance and government control: Evidence from China's listed state-owned enterprises

Using a sample of 916 Chinese listed state-owned enterprises (SOEs) from 2001 to 2005, we find that the likelihood of top management turnover is negatively associated with firm performance, suggesting the existence of an effective corporate governance mechanism in an emerging economy that is highly controlled by government. We also find that the negative turnover–performance relationship is stronger when the SOE is directly held by the central or local government, holding a monopolistic position in a local economy or in a strategic/regulated industry. The results indicate that the market-based corporate governance mechanism that disciplines top executives as a result of poor performance is not only used in Chinese SOEs, but is used more frequently when the governance control of SOEs is more intense. Our findings support the notion that government control strengthens rather than weakens the turnover–performance governance mechanism. Our additional analysis shows that this complementary effect is stronger in regions that lack pro-market institutions, such as investor protections and a functioning capital market.     

Security regulations,access to capital markets,and firm performance: Evidence from China

This study explores the cost of security regulations in China, where firms are required to meet a certain profitability benchmark before applying for permission to raise more equity via secondary equity offerings (SEOs). Using a difference-in-differences setting, we show that firms affected by the regulation (i.e., firms with high external financing demands (EFD) but profitability lower than the regulatory requirement) significantly underperform their counterparts, while unaffected firms do not. The affected firms’ performance decline increases (decreases) when the requirement of profitability is more (less) restricted. Consistently, the three-day cumulative abnormal return (CAR) of firms with high EFD is significantly negative (positive) when the regulation is tightened (loosened). Our study provides evidence on how the cost of regulation affects companies that have growth opportunities.     

The effect of corporate culture on firm performance: Evidence from China

This study examines whether corporate culture promotion affects firm performance in China in terms of firm market value, firm financial performance and innovation output. We find consistent evidence that corporate culture promotion is negatively related to firm market value, positively related to innovation output and not significantly related to firm financial performance. In addition, the negative effect of corporate culture promotion on firm market value is driven by small firms and firms located in less developed provinces. Furthermore, we find that some specific corporate culture promotions, such as innovation culture promotion and integrity culture promotion, are not related to firm value or financial performance. However, innovation culture promotion is positively associated with innovation output.     

CEO turnover in China: the role of market-based and accounting performance measures

We investigate the relationship between chief executive officer (CEO) turnover and firm performance in China's publicly traded firms. We provide evidence on the use of accounting and market-based performance measures in CEO turnover decision. We also investigate the moderating roles of noise in performance measures, firm growth opportunities, state-owned enterprises, and corporate governance reform on the weights attached to these performance measures. We observe that Chinese listed firms rely more on accounting performance than on stock market performance when determining CEO turnover. Firms with noisier performance measures and larger growth opportunities rely less on both accounting performance and stock market performance in CEO replacement decision. State-controlled firms are more likely to use accounting performance to determine CEO turnover. Finally, we observe that the weight attached to the accounting performance measure is significantly reduced and the weight attached to the stock market performance measure is significantly increased after the governance reform. We also observe that the reform has different impact on state-owned firms and private firms in terms of the sensitivity of CEO turnover to firm performance.     

CEO turnover and the reduction of price sensitivity

We examine managerial compensation and wealth sensitivities around CEO changes. The average new CEO is incentivized to increase the risk of the firm primarily because he holds significantly less stock than his predecessor, and in fact riskier policy choices are subsequently implemented. Similar results are obtained in a subsample of CEO changes that are due to retirements and deaths, which alleviates concerns about endogeneity. Our findings indicate that firms seem to be limited in their ability to mitigate the risk-averse behavior caused by large CEO shareholdings.     

CEO decision horizon and firm performance: An empirical investigation

We investigate the effect of top managers' myopia on firms' market valuation. We devise a measure of expected CEO tenure as a proxy for the length of CEO decision horizon. After accounting for the endogenous nature of CEO horizon, our empirical tests show that shorter CEO horizon is associated with more agency costs, lower firm valuation and higher levels of information risk. The results are consistent with the notion that a short CEO decision horizon is indicative of preference for investments that offer relatively faster paybacks at the expense of long-term value creation.     

Managerial ownership and firm performance: Evidence from China's privatizations

We examine the relationship between managerial ownership and firm performance for a sample of Chinese State-owned enterprises (SOEs) privatized over the period 1992-2000. The results indicate that managerial ownership has a positive effect on firm performance. Although return on assets (ROA) and return on sales (ROS) decline post-privatization, firms with high managerial ownership and, specially, high CEO ownership, exhibit a smaller performance decline. The difference is highly significant, with or without controlling for residual state ownership and changes in the firm's operating environment. We also find that the influence on firm performance becomes less significant at higher levels of CEO ownership. In contrast, performance continues to increase with managerial ownership. This finding suggests that, beyond a certain point, the distribution of shares would be more effective if extended to the whole management team instead of being limited to the chief executive.     

CEO investment of deferred compensation plans and firm performance

We study how US chief executive officers (CEOs) invest their deferred compensation plans depending on the firm's profitability. By looking at the correlation between the CEO's return on these plans and the firm's stock return, we show that deferred compensation is to a large extent invested in the company equity in good times and divested from it in bad times. The divestment from company equity in bad times arguably reflects CEOs' incentive to abandon the firm and to invest in alternative instruments to preserve the value of their deferred compensation plans. This result suggests that the incentive alignment effects of deferred compensation crucially depend on the firm's health status.     

Confucianism,successor choice,and firm performance in family firms: Evidence from China

This study examines the nexus between Confucianism, the choice of the leadership successor, and firm performance in family firms in China. It provides original evidence that firm founders who are deeply influenced by Confucianism have a higher likelihood of choosing a family member or a guanxi-connected nonfamily member as the successor. Moreover, family/guanxi-connected successors have a positive effect on firm performance compared with their counterparts outside of the family/guanxi circle. One underlying reason is that, affected by Confucianism, only the family/guanxi-connected successors can acquire the founder's specialized assets via pre-succession internal managerial experience, which, in turn, enables them to outperform other successors.     

Corporate lobbying,CEO political ideology and firm performance

In this paper, we investigate the influence of CEO political orientation on corporate lobbying efforts. Specifically, we study whether CEO political ideology, in terms of manager-level campaign donations, determines the choice and amount of firm lobbying involvement and the impact of lobbying on firm value. We find a generous engagement in lobbying efforts by firms with Republican leaning-managers, which lobby a larger number of bills and have higher lobbying expenditures. However, the cost of lobbying offsets the benefit for firms with Republican CEOs. We report higher agency costs of free cash flow, lower Tobin's Q, and smaller increases in buy and hold abnormal returns following lobbying activities for firms with Republican managers, compared to Democratic and Apolitical rivals. Overall, our results suggest that the effects of lobbying on firm performance vary across firms with different managerial political orientations.     

Corporate governance practices,CEO characteristics and firm performance

This paper examines the link between firm performance, CEO characteristics and changes in corporate governance practices using an unbalanced panel of 1721 firms from 1980 to 1995. This paper provides the stylized facts about corporate governance practices and details how governance practices have evolved over time. By 1995, the majority of firms had implemented differing types of charter amendments, poison pills or other governance provisions that are potentially harmful to shareholders. Most firms have adopted multiple and even redundant governance provisions. Shareholders are more likely to approve an increase in the power of the boards of directors of better performing firms, while the boards of poorly performing firms are much more likely to initiate governance changes, such as poison pills, that circumvent shareholder approval. I find no relationship between CEO age, tenure or compensation and governance changes.     

Political connection,CEO gender,and firm performance

The political connection of a CEO is a determinant of firm performance. Shocks to the CEO's political connection can create fluctuations in firm performance. However, the underlying economic mechanisms between the CEO gender gaps in firm performance and CEO's political connections are not well understood. Using the political leadership transition in 2012 in China as an exogenous shock, we find that the CEO gender gap in firm performance is diminished in response to the more destruction of female CEOs' political connections. We control the firm characteristics by the propensity score matching method, suggesting the change of the political connection is the main reason for the narrowing of the CEO gender gap in firm performance.