Board reforms and managerial risk-taking incentives: evidence from Chinese central state-owned enterprises

Abstract

Purpose

This paper examines the effect of board reforms on managerial risk-taking incentive provision in state-owned enterprises (SOEs) whose managers are undue risk-averse.

Design/methodology/approach

We use the staggered implementation of board reforms in Chinese central government-controlled state-owned enterprises (CSOEs) as an exogenous shock to board governance. We collect data on board reforms for a set of pilot CSOEs during the period 2005 to 2020 from the State-owned Assets Supervision and Administration Commission (SASAC) website by hand. We use a generalized difference-in-difference (DID) design to test the effect of staggered board reform adoption on managerial risk-taking incentive provision.

Findings

We find a positive relationship between board reforms and risk-taking inventive provision, i.e. pay-performance sensitivity, promotion-performance sensitivity and performance target difficulty. The documented relationship is stronger when the value of risk-taking is higher. We also find that board reforms lead to greater risky but value-enhancing investments and that managerial risk-taking incentive provision acts as an important channel through which board reforms improve value-enhancing risk-taking.

Originality/value

Our findings suggest that board reforms that improve board governance are effective in addressing risk-related agency conflicts in emerging markets. The findings also highlight the importance of managerial risk-taking incentive provision in inducing risky but value-enhancing investments.

Citation

Hu, S., Wei, C., Xue, R., Yin, L. and Zhu, B. (2024), "Board reforms and managerial risk-taking incentives: evidence from Chinese central state-owned enterprises", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-04-2024-0062