Change in company leadership, subordinate executive team restructuring, and investment efficiency

Abstract

Under the Chinese corporate governance model, the change of “leader” is one of the most significant occurrences for a company, and there is a strong relationship between “leaders”(chairman and CEO) and the executive team under them. Using data from listed A‐share businesses in China from 2007 to 2018, this study evaluates the effects of leaders' changes on investment efficiency and the effects of subordinate executive team restructuring caused by “leadership” change on investment efficiency. The findings reveal that the change of “leaders” significantly reduces company's investment efficiency, and the greater the degree of restructuring of subordinate executives caused by the change of “leaders”, the greater the negative impact on the company's investment efficiency. Nevertheless, the successor leader with a financial background can well mitigate the negative impact of the subordinate executive team restructuring on investment efficiency. In further analysis, we discover that the subordinate executive reorganization results in both overinvestment and underinvestment. However, state‐owned enterprises are more resilient to the damaging impacts of organizational shocks. Additionally, a good internal and external regulatory mechanism can mitigate the negative impact of the subordinate executive teams restructuring on investment efficiency. In conclusion, this study provides scientific support for improving executive team management and optimizing investment decisions for companies.