This paper examines empirically the quality of the governance mechanisms of Chinese
state-owned enterprises from 1994–1999, a period marked by substantial changes
in policies affecting the governance structure of these firms. It shows that the
restructuring of these enterprises according to corporate law improved the effectiveness
of their governance system. Specifically, restructuring strengthened the links between
manager turnover and firm performance.
The results indicate that firm performance was significantly and negatively related
to manager demotion for incorporated state-owned enterprises, while this relationship
was insignificant for unincorporated enterprises. They also indicate that manager
turnover was a viable incentive mechanism for improving future enterprise performance.