Study On Relationship Of Managerial Entrenchment And The Efficiency Of Corporate Governance

At present, the listed companies have a very significant feature that the“shareholder absence" has arouses managerial entrenchment as an agency problem. Theso-called managerial entrenchment, refers to the managers tend to choose what isconducive to maintaining their own positions and the pursuit of self-interest maximizingin the internal and external control mechanisms. Due to the lack of effective internaloversight mechanisms, agency costs are increasingly arising between shareholders andmanagers because of the asymmetric information. This can be viewed from twoperspectives: First, from the shareholders’ sight, on considering the fact that themanagers may overly maximize their own utility when making relevant decisions whichmight damage shareholders’ interests, shareholders have taken various measures toimpose constraints and oversight on managers. Second, from the managers’ sight, theyare afraid of being dismissed because of their bad decisions leading to a bad corporateperformance. Thus, they will have the thought of managerial entrenchment. When itcomes to the post-conversion costs and the possibility of losing the corporate control,the motivation of managerial entrenchment will become stronger. Given its constrainfrom shareholder weakening and the control of corporate strengthening, as well as thestress from cost of conversion, managers may have a behavior of managerialentrenchment, in order to satisfy their own interests, and on the contrary, ignore theinterests of shareholders. As a result, the shareholders have to pay for this huge agencycosts.As the deepening of principal-agent theory, managerial entrenchment provides anew perspective to explain the behavior of enterprise managers. However, domesticscholars in this area haven’t achieved a breakthrough on its influencing factors, measuretools or other key issues yet. This is because the managers’ real motive of taking certainaction or policy is not observable. Managerial entrenchment involves managers’ deepinner thoughts, which makes it difficult to determine causality of motivation andbehavioral outcomes from the financial information. Overall the previous papers, Thismight be a good explanation why qualitative analysis is widely used, but the empiricalformula comes to the contrary. IN addition, research on the efficiency of corporategovernance sees the new trends. Many studies suggest that good corporate governanceenvironmental mechanism must have an effective monitoring mechanism, which cancorrectly determine the contribution managers make for company performance. If the listed companies can actively constraint and discipline incompetent administrator, youcan determine the corporate governance efficient. IN order to study the relationshipbetween managerial entrenchment and efficiency of corporate governance, this articlehas made relevant theories summarized and empirical studies done, aimed atsafeguarding shareholders’ own interests and providing advices for the improvement ofcorporate governance mechanisms.This article first makes relevant theories such as theory of separation of ownership,economic man hypothesis, asymmetric information theory, incomplete contract theoryand control right theory summarized, which constructs theoretical background for themanagerial entrenchment hypothesis. Under the background of the ownership separated,it is impossible for manager to pursue unconditionally to maximize shareholder valuewhen the manager is considered as a finite rational economic man. In addition, withmanagers sharing the greatest control right, their personal goals and preferences willinevitably impact on the company’s financial policy choices and the final performanceoutcomes. Then, this article put the principal-agent theory and modern stewardshiptheory together to enrich the theoretical part of the efficiency of corporate governance,which confirms that the agency theory fits more on the basis of the perspective ofmanagerial entrenchment. Furthermore, this article also introduces upper echelonstheory as the theoretical foundation of the relationship of management entrenchmentand the efficiency of corporate governance.In this article, the research interval is between2010and2012. It chooses mainboard listed company A shares as the research object from the Shanghai StockExchange and the Shenzhen Stock Exchange, and at last, make empirical analysisthrough the establishment of model and assumptions. First, it makes a summary aboutthe influential factors of managerial entrenchment. On the foundation of individualcharacteristics, incentive and monitoring characteristics of manager, this article hassummarized the influential factors of managerial entrenchment, such as age, tenure,diploma, turnover costs, pay, manager’s shareholding, proportion of independentdirectors, chairman and manager on the same position and ownership concentration. Onthe basis of principal component analysis, it extracts principal components from theabove nine factors, and finally calculate the overall managerial entrenchment indexthrough the contribution rate of each factor. In the empirical study, the Tobin’s Q willact as the explanatory variable to take the place of the efficiency of corporategovernance. It comes to the end that, the more serious managerial entrenchment is, the lower the efficiency of corporate governance will be. The higher manager’s age,conversion cost and the proportion of shareholding is, the more serious managerialentrenchment will be, leading to poor efficiency. The higher manager’s diploma is, thelower the degree of managerial entrenchment will be, leading to good efficiency. Inaddition, the other five factors share no significant correlation with the efficiency ofcorporate governance.This article takes the upper echelons theory as foundation theory, and thenintroduces how management entrenchment affect the efficiency of corporate governance,which has made a contribution to inhibit listed company managers’ opportunisticbehavior, ease the conflict of agent cost upon the background of principal-agency, andprovide evidence for optimizing corporate governance mechanism and promoting theefficiency of corporate governance.