Top Management Turnover and Corporate Governance in China: effects on innovation performance

Research Question: How does Chinese corporate governance in publicly-listed firms affect the relationship between innovation productivity and top management turnover? Is state shareholding in China a positive force for innovation productivity? Research Insights: A balance is maintained between the negative effect of (relatively high) top management turnover on investment horizons and innovation productivity, mitigated by positive effects of high state ownership, up to a certain level of ownership concentration. Beyond this level, potential for abuse by the dominant shareholder curtails positive effects on innovation. This contrasts with foreign dominant shareholders where no alignment between dominant shareholder and top management occurs and shorter investment horizons are preferred with lower innovation productivity. Theoretical Implications: In China, with state-held and controlled publicly listed firms, there is an alliance between the dominant shareholder and top management with relatively low employee protection and weak protection for lesser shareholders . This may have positive outcomes for long term innovation but may also lead to principal-principal abuses. Any such alliance needs to be tempered by stronger internal governance structures to protect minority shareholders. But stronger protection may in turn reduce investment horizons and lower innovation. Policy Implications: As well as strengthening external corporate governance mechanisms, insider corporate governance mechanisms need to be strengthened to discipline managers. However stronger countervailing powers to secondary shareholders, stronger Supervisory Board rights and greater independence of Directors may tend to decrease time horizons of investment for the firm and impede innovation.