Big is Beautiful: How State Shareholders Discipline Their Ceos in China
Abstract: This study explores management monitoring in state-owned firms by explicitly distinguishing between the profit and size motives and estimating their relative importance in determining the forced turnover of Chief Executive Officers (CEOs). Based on a sample of 1,555 turnover cases among listed firms in China during the period 1999 to 2003, we obtain three main results. First, CEO turnover is negatively related to the asset turnover but not the profit margin of the core business. Second, the negative relationship between CEO turnover and asset turnover is stronger for firms with excessive employment and a higher organizational slack. Third, there is a significant post-turnover increase in asset turnover but a decline in profit margin. Overall, our evidence is consistent with the hypothesis that state shareholders put a greater emphasis on sales generation than on profitability when they monitor their CEOs. To our knowledge, this is the first study to provide evidence that the inherent preference of state shareholders for size maximization over profit maximization has material consequences for CEO monitoring.
