Financial Crisis Chinese Essay Example Pdf - Free Essay Example

Personal motivation. The main motivation for choosing this topic: corporate governance in China is to observe the influence and change that was brought by American financial crisis in internal governance mechanism, especially in board of directors. China has nurtured an amount of giant corporations that have proven competitive in the international market and elite Chinese companies such as Hair Group, Sinopec, Sinochem and Lenovo enjoy a sound prestige around the world. In addition, the promulgation of the Company Law in 1993 and Guiding Opinion of Establishment of Independent Director Systems by Listed Companies in 2001 stands for the entry of independent director system in Chinese corporate governance practice. However, there are still many defects in the execution and implement of these regulations, such as: legal and regulatory issues and governance intervention. Therefore, the present paper is trying to figure out how the board characteristics impact on firm performance or efficiency during the crisis period. Academic motivation. A large number of researches focus on the developed and mature economy entities in corporate governance issues or practices. Due to the poor governance practice and the undeveloped capital market, less attention was drawn on transition economies, such as China. In addition, there are even less literature describing and analyzing board characteristics during the financial disorder in China. That is the main gap this paper is planning to fill. Research question: The fundamental problem statement of this research is: How the board characteristics influence firm performance in China during the financial crisis? This research attempts to find the relationship and impact between the board characteristics and the firm performance. The board characteristics in this paper refer to board independence, stock ownership, director qualification (which refers to accounting, finance or law background, experience in unaffiliated firms, education level, and age), and board activism. Firm performance is related to the stock performance, growth in sales and earning etc. Some sub questions are listed as following to make the issue more specific: How did the firm with the board including more senior managers or political related representatives perform relatively to the board with less this kind of directors? How did the firm which has the board containing more directors with accounting, law background, experience in unrelated firms and academi c background perform during the hard time? Did the firm perform better if the directors own an amount of equity stake in the company during the crisis time? Did the firm perform better if the directors participation which is regards as the frequency of board meeting per year is more active in the financial disorder? Theories There are two pillows of theories contributing to this paper. Firstly, what characteristics should be considered when referring to a good board and the hypothesis between these characteristics and firm performance. Chenxia (2004) cites that Business Week ranked the best and worst corporate boards in the United States according to the following principles: independence, stock ownership, director quality and board activism. The independent directors are defined as directors who do not hold a managerial position in the company. And independent directors generally care about their reputations and social status; therefore, they have incentives to monitor the management and ensure the effective running of the company (Fama and Jensen, 1983). The degree of professionalism and monitoring required by a firm is likely determined by the institutional environment to which the firm adapts (Hermalin and Weisbach, 2003). Hernmalin and Weisbach (1988) also argue that independent directors with pro fessional qualifications such as in accounting, finance or law area took up a large ratio in the board in US firms. The second issue is to consider the Chinese features for the corporate governance. Chen et.al (2009) argue that board of directors in publicly listed firms consists mainly of representatives or officials from the government and other state enterprises, whose interests may not be in line with those of outside investors. Some social reforms such as corporatization, privatization and marketization are on going in China. Therefore, these theories are applied and tested during the period of financial crisis. The main hypotheses can be presented in the present paper: H1: Board with more independent directors has a positive relation with firm efficiency in this financial turmoil. H2: Board with directors who have the professional background in accounting, law and finance has positive impact on firm efficiency in financial crisis. Methodology Data source The stock return and financial data are from the China Stock Market and Accounting Research CSMAR database, which is conducted by the University of Hong Kong and Shenzhen GTA Company according to the format of CRSP and COMPUSTAT. All the firms in the sample are listed companies on Shanghai Stock Exchange and Shenzhen Stock Exchange. The information about the board of directors in each company is obtained from the Election of directors part in annual proxy statement from the year 2007 to 2009. From the director profile, the each directors current or former business experience, professional background, education, age and political connection are identified. Some regression analyses are conducted to examine the effect of board characteristics on firm performance. The dependent variables referring to firm performance and independent variables referring to board characteristics are mentioned in the above research question part. In addition, the firm performanc e is divided into stock performance and accounting performance. Thus: Changes in stock price / Growth in sales / Growth in earnings = A+ B* ratio of independence directors + C* ratio of political representative in the board+ D* director with professional background+ E* directors education level+ F* directors age+ G * the number of boarding meeting+ error term. In the regression analysis, some control variables are included: the fraction of common shares held by the largest shareholder (usually the government), the log of total assets and the regulated industry dummy variable. Contribution The main contribution of this research is to find out the relationship between board characteristics and firm performance during financial crisis. It is helpful to identify the specific defects in the board structure of Chinese companies and make progressive improvement in internal governance mechanism for regulators and practitioners. For instance, the effective enforcement of independent director system can weaken contradictions of controlling shareholders and medium and small stockholders in the interest conflict; the requirement of directors qualification in accounting, law etc can enhance the rationality and transparency of decision-making about the signification issue such as merger and acquisition, stock repurchase and executive compensation.