Appointments of Outsiders as CEOs, State-Owned Enterprises, and Firm Performance: Evidence from China (Digest Summary)

To study the impact of outside CEO successions on firm performance, the authors investigate the appointment of external CEOs in China. They examine whether the appointments are determined by firm-specific characteristics as well as the differences between the behavior of state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs). They also look into the unique experience of outside CEOs and how that experience affects performance. Finally, the rationale for the appointment of outside CEOs by high-risk firms is explored.

In high-growth developing economies, such as China, firms need to make critical decisions to ensure that they grow. One important decision that firms make is the appointment of a CEO to replace an exiting CEO. China has a high CEO turnover rate, and the appointment of CEOs from outside the firm is more frequent than elsewhere. In examining whether firms appoint outside CEOs based on firm-specific reasons, the authors identify six specific firm characteristics that could determine outside appointment: firm risk profile, firm growth rate, firm performance, firm size, forced CEO turnover, and corporate governance. They examine the two types of firms that exist in China—namely, SOEs and non-SOEs.

The authors discover that SOEs appoint external CEOs on the basis of firm-specific characteristics, especially in the case of high-risk firms and firms with high market-to-book ratios. In contrast, non-SOE appointment of outside CEOs is not determined by firm-specific factors. SOEs that appoint external CEOs on the basis of firm-specific factors are more likely to enjoy positive performance and reduced risk. In examining differences between appointments of external CEOs from inside and outside of the same industry, the authors reveal that high-growth and high-risk firms are likely to appoint external CEOs, regardless of whether the CEOs worked inside or outside the industry. Small firms, however, are likely to appoint external CEOs from outside the industry.

External CEOs bring a unique experience to high-growth and high-risk SOEs. The authors suggest that SOEs that appoint outsiders with prior experience in larger firms gain superior performance relative to firms that appoint insiders or outsiders from smaller firms. In addition, they explore why high-risk SOEs often appoint outsiders as CEOs and note that such appointments are made as an attempt to reduce the firm’s risk.

The data the authors use are from the Shanghai and Shenzhen Stock Exchanges for Chinese-listed entities (excluding financial firms). The data regarding CEO appointment announcements and turnovers are from the China Stock Market and Accounting Research database. They use the period of 2002–2008, and the data include 1,484 CEO appointments.

The authors carry out robustness tests on the influence of outside CEOs by changing the performance period and by measuring volatility using abnormal returns. As an additional test, they use illiquidity discounts ranging up to 50% in order to measure the market value of equity for non-tradeable shares. Their results remain the same after conducting these robustness tests. But the authors fail to explain why financial firms are excluded from the sample and what the possible impact on the results would have been if financial firms were included.

The authors add to the current literature on outside appointments of CEOs and their impact on performance. Their finding that outside CEO appointments often lead to superior future financial performance could help investors in China make informed decisions. Further research on the impact of outside CEO appointment in other emerging economies would be beneficial.