The Impact Of Top Executive Ability On Company Value And Performance

The role of top executive in company and the impact of top executive on company has always been more than just the focus of academia research, but also the controversy center of social hot topics in reality, the research of Bebchuk and Fried (2004) shows that CEO in company actually set their own remuneration packages, for the reason that they can easily grasp the board of directors. According to this view, top executive pay is determined by them rather than their ability, therefore the impact of their ability on company’s value is not important. However, supporters of Optimal Contracting Approach, such as Frank H. Easterbrook (1984), point out that in order to achieve the goal of maximizing shareholder value, the board has to consider minimizing the principal-agent costs between top executives and shareholders while designing top executive compensation. Besides, Rosen (1982), as well as Gabaix and Landier (2008), point out that the distribution of top executive talent in the economy provides the theoretical underpinnings for the talent assignment models. According to top executive talent distribution model, top executive ability varies from each other and also these existing differences really matter and affect his company value and performance.Today, the global financial crisis brings the question whether the top executive ability really matter into fierce thinking again. And this even sharper focus directly question whether top executive really creates value to the company that they manage. Besides, even some begin to believe that the top executive pay reflects their rent extraction to the company rather than their ability’s contribution to company. Although the voice of suspicion in top executive ability become more and more higher, the empirical research about the impact of top executive ability on company’s value, performance is surprisingly little.This thesis, utilizing top executive turnover in2008from A-share stock market in China as sample, achieves the following conclusion. Firstly, the existing effect of top executive ability on company is verified by the two dimensions of stock market reaction and the actual operation performance changes after top executive turnover. Specifically, the better the company operation performance that top executives managed previously is, the more negative the stock market reaction will be, and similarly, the more seriously the following actual operation performance will decline. Secondly, the moderating role of turnover style between top executive ability and its impact is explored. The forced turnover, compared to voluntary turnover, will make the impact of top executive ability on company’s actual operation performance in the following second year become weaker. Lastly, some alternation explains are offered for the unapproved hypothesis that addressed reasonable in theory and logic. Shortly, this thesis attempts to confirm that the differences of top executive ability exist and affect company and make a little contribution to this research area in theory and practice.