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In China’s state-owned listed companies, there exists the type I agency problem primarily caused by owners’ absence and insiders’ control, as well as the type II agency problem of the infringement on the interests of small and medium-sized shareholders by the largest shareholders. Our research examines the relationship between directors appointed by non-state shareholders and the CEO turnover–performance sensitivity, so as to clarify whether directors appointed by non-state shareholders are more inclined to monitor the type I agency problem or the type II agency problem. Using the sample of state-owned listed companies from 2006 to 2016, we find that directors appointed by non-state shareholders are more likely to monitor the type II agency problem, as demonstrated by significantly reducing the CEO turnover–performance sensitivity. Our research also finds that directors appointed by non-state shareholders play more important role in reducing the CEO turnover–performance sensitivity when the company has a high degree of separation of ownership and control, operates in the non-regulated industry, and has a large number of following security analysts. Besides, we perform propensity score matching, instrumental variable regressions, placebo test and several robustness checks to address possible endogeneity concerns and measurement errors.

emerging markets finance and trade

Monitoring the Type I Agency Problem or the Type II Agency Problem? Directors Appointed by Non-State Shareholders and the CEO Turnover–Performance Sensitivity