Appointment of Politically Connected Top Executives and Subsequent Firm Performance and Corporate Governance: Evidence from China’s Listed SOEs

Abstract

This paper investigates the decision to appoint politically connected top executives to Chinese listed state-owned enterprises (SOEs) when they face distressful conditions and whether such appointments enhance or reduce firm performance and corporate governance in subsequent years. China is the world’s largest emerging economy, and Chinese SOEs are under intensive state control and are obliged to draw on a less developed managerial labor market. Using data on the top-management turnover of listed SOEs from 2001 to 2005, we find that state-owned companies are more likely to replace top executives and appoint a politically connected executive when they encounter a distress such as poor ROA, an earnings loss, a high financial risk, or regulations violation. We also find that newly appointed politically connected top executives subsequently improve firm performance and governance structures and reduce the frequency of illegal action by firms. However, there is no evidence that newly appointed politically connected top executives benefit firms through affording them preferential access to resources or government assistance. The findings suggest that politically connected executives may be selected for the alignment of shareholders’ interests and for their special managerial talent in emerging markets dominated by government ownership, and may display additional managerial productivity in such an environment.

Keywords: appointment of top executives, politically connected executives, firm performance, corporate governance