Delegation and Sensitivity of CEO Turnover to Firm Performance within Business Groups: Evidence from China

In emerging markets, companies are often organized into corporate groups in which the controlling shareholders control the member firms through stock pyramids and cross-shareholdings. We examine how the incentive for these controlling shareholders to maximize the value of groups results in less delegation of decision rights to the CEO of the member firm and, in turn, how such delegation affects the rate of CEO turnover in response to the financial performance measures reported by member firms. Our results suggest that delegation, measured as the extent to which controlling owners control the board of directors, is negatively associated with the interdependence of member firms. We also find that delegation weakens the sensitivity of the CEO-turnover rate to financial performance measures. These findings extend the literature by providing evidence on how delegation and management-incentive arrangements are jointly determined at the firm level.