Policy burdens, firm performance, and management turnover

Lin, Cai, and Li [Lin, Y., Cai, F., Li, Z., 1998. Competition, policy burdens, and state-owned enterprise reform. American Economic Review 88, 422–327] argue that under information asymmetry, SOE managers can use state-imposed policy burdens as excuses of poor performance and make the State accountable for it. The argument implies that turnover–performance sensitivity of SOEs decreases as policy burdens increase and that such impact depends on the extent of information asymmetry. Accordingly, this paper empirically explores how policy burdens affect top management turnover of Chinese listed firms between 2000 and 2005. We find that high surplus labor significantly reduces the sensitivity of chairman turnover to performance for state-controlled firms, while private firms do not exhibit such a pattern. Furthermore, our results show that high surplus labor reduces the turnover–performance sensitivity more for firms with greater information asymmetry. Overall, we find strong evidence supporting the implications of Lin, Cai, and Li [Lin, Y., Cai, F., Li, Z., 1998. Competition, policy burdens, and state-owned enterprise reform. American Economic Review 88, 422–327]. In addition, we find that chairman turnover of Chinese firms is sensitive to different performance measures for state-controlled firms and private firms.