Firm Performance and CEO Turnover: A Subnational Institutional Perspective

The relationship between poor firm performance and CEO turnover has been thoroughly examined in the developed country context. However, the relationship is less clear in the emerging economy context. Drawing on agency theory and institutional theory, our theoretical model and empirical findings from 2,763 Chinese listed companies over the years 1997-2009 show that firm performance does not have a direct effect on CEO turnover. The absence of the relationship can be explained by under-developed corporate governance practices in China. More specifically, due to varying rates of development in market institutions in the different subnational regions, we find a significant and positive relationship between poor firm performance and CEO turnover in regions with less government intervention, greater market development, and a more developed legal institutions. The research contributes to our understanding of corporate governance practices in emerging economies and emphasizes the importance of subnational institutions.