Study of the effectiveness of China’s corporate governance reform – a board characteristics view
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This study investigates the effectiveness of China’s corporate governance reforms in the year 2002 on firm performance. Specifically, the study investigates the relationship between good firm performance and board characteristics that capture boards’ monitoring and resource provision abilities before and after the corporate governance reform. This study firstly examines whether the Chinese corporate governance reform in year 2002 has caused changes in board characteristics, then the study relates the measurements for good firm performance to board characteristics that represent boards’ monitoring role (i.e., director independence, CEO-chair duality, concentration of directors appointed after the CEO, and director share ownership) and resource provision role (i.e., board size, directors on multiple board, director tenure, and frequency of supervision board meetings). The study uses a data envelopment analysis (DEA) approach to calculate a firm economic efficiency score as the main measurement of firm performance. For sensitivity analysis, traditional measurements including share returns, return on assets and Tobin’s Q have also been applied to consolidate the findings. The study provides evidence that China’s corporate governance reforms in year 2002 has resulted in changes regarding to the number of independent directors on board, CEO-chair duality, director tenure and frequency of supervision board meetings. Those changes are towards enhancing investor protection and improving firm performance, which the evidence is consistent with the prediction that the year 2002 corporate governance reforms will change the corporate governance factors of Chinese listed firms. However, inconsistent with the agency theory and resource dependence theory predictions, this study shows that board characteristics do not have a significant relationship with firm economic efficiency score. The additional tests of using traditional performance measurements also shows corporate governance factors before and after the reform do not influence firm performance. These findings point to a significant problem. It would seem that China’s corporate governance reform in year 2002 has made Chinese listed firms simply obeys the governance code, rather than fully utilise it. Therefore, the corporate governance reform in the year 2002 has enhanced the corporate governance factors, however failed to improve firm performance. Therefore, the findings have implications for regulators in emerging economies, that the corporate governance code should be developed and modified based on the specific characteristics of a countries economy, rather than simply following the developed countries’ regulatory system.