CEO Turnover, Firm Performance and Enterprise Reform in China: Evidence from New Micro Data

Using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002, augmented by unique data on CEO turnover, ownership structure and board characteristics, we estimate Logit models of CEO turnover and find that: (i) even if the firm is listed in the stock exchanges, there is no significant and negative link between CEO turnover and firm performance unless there is a large controlling shareholder; (ii) turnover-performance sensitivities are stronger for privately-controlled listed firms than for state-controlled listed firms and are the strongest when the large controlling shareholder is a private firm or individual; (iii) the listing suspension mechanism, i.e., the ST designation, adopted by China’s securities regulatory agency, is effective in improving the performance-turnover link in Chinese listed firms; (iv) the appointment of independent directors enhances turnover-performance sensitivities; (v) turnover-performance sensitivities are weaker for listed firms with CEOs who also hold positions in the controlling shareholders; and (vi) firm performance improves significantly after the replacement of the CEO and the improvement is greater for privately controlled firms than for state controlled firms. Consistent with the “law and finance” approach to corporate governance and the literature on economic reform in general, our findings suggest that any fundamental improvement in China’s corporate governance will require a broad program that encompasses not only privatization but also laws and their effective implementation to provide better protection for investors.