The Political Association Gap Between Chairman and CEO and

Corporate Risk Taking

Wei Wei and Mengge Li*

School of Economics and Management, Beijing Jiaotong university, Beijing, China

Keywords: Political Association, Risk-taking, Chairman, CEO.

Abstract: This paper takes Shanghai and Shenzhen A-share listed manufacturing companies from 2016 to 2019 as

research samples, substitutes the data into the Stata to remove the vacancy value, and then uses the command

to reduce the tail by 1%. Firstly, the data of each variable is analyzed through descriptive analysis, and then

takes the political correlation gap between CEO and director as the independent variable, the level of

enterprise risk-taking as the dependent variable, and the enterprise scale EBIT, listing years and annual income

growth rate are used as control variables, and the annual variables are controlled. A univariate regression

model is constructed. The panel data is defined by Stata. The results show that the political correlation distance

between CEO and chairman significantly reduces the risk-taking level of enterprises; In terms of demographic

characteristics, gender differences promote the reduction of political connection gap on enterprise risk-taking.

This paper enriches and expands the research on enterprise risk-taking and executive heterogeneity, which is

of great practical significance for the introduction of talents.

1 INTRODUCTION

At present, our country capital market development

is not yet mature, the enterprise when making

investment decisions are more or less always faced

with a certain amount of uncertainty, enterprise risk

bearing level in managers when making investment

decisions on the choice of investment projects (Yu, Li,

Pan 2013), the higher expected returns, enterprises

are facing the uncertainty of the risk is higher. A

certain degree of risk taking can accelerate capital

accumulation, improve enterprises' enthusiasm for

innovation and innovation investment, increase

shareholders' wealth, and improve enterprise

performance (Li, Yu 2012).

Therefore, in order to obtain profits, enterprises

voluntarily choose some high-risk investment

projects, which is the driving force of economic

growth.

In two separate companies at present, few

scholars from the perspective of executives and the

differences of the board of directors to study, and the

chairman and CEO at the core of shareholders and

management members, both background

characteristics is very important to corporate

governance, the background characteristics of

synergy, if we can have a significant similarity

between the corporate governance has a positive

meaning, of course, Differences in background

characteristics will also have different effects on the

company. The vertical pairing characteristics of

chairman and general manager are negatively

correlated with corporate performance. The

difference between the values of chairman and

general manager is positively correlated with the

R&D intensity of the company (Wang, Gu, Zhang

2019).

This paper provides a new idea for the study of

enterprise risk from the perspective of vertical

characteristics of chairman and CEO, enriching the

influencing factors of enterprise risk taking.

Focusing on corporate risk-taking, this paper

enriches the impact of TMS characteristics on

corporate governance, and empirically examines the

role of gender differences in the relationship between

political relevance and corporate risk-taking.

Wei, W. and Li, M.

The Political Association Gap Between Chairman and CEO and Corporate Risk Taking.

DOI: 10.5220/0011754600003607

In Proceedings of the 1st International Conference on Public Management, Digital Economy and Internet Technology (ICPDI 2022), pages 687-691

ISBN: 978-989-758-620-0

 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

687

2 THEORETICAL ANALYSIS

AND RESEARCH HYPOTHESIS

The high-level ladder theory holds that the decision-

making of top managers is influenced by their

psychological structure and tenure, and their

psychological structure and cognitive ability are

evolved under a unique background and based on

experience (HAMBRICK, MASON 1994, Li, Wang

2019).

The influence of the political connection gap

between chairman and CEO on corporate risk taking

can be analyzed from the following aspects:

First, enterprise resources may affect the ability of

entrepreneur management degrees of freedom, if

there is no sufficient resources, so executives in

ability and motivation of strategies will be

constrained (Finkelstein, Hambrick & Cannella

2009), executives political association for enterprise

to bring the high quality resources, the higher the

political association level means that the can bring

more resources, more convenient, An enterprise's

demand for resource acquisition can influence the

composition of the board of directors and the dual

role of THE CEO, and then determine the strategic

dominance of the board of directors and the CEO

(Zhou, Luo, Yu 2015). Therefore, the political

connection gap will lead to the unequal discourse

power of the chairman and CEO in resource

allocation in venture investment, which further leads

to excessive investment and blind investment. From

the perspective of heterogeneity, the political

association as a function of background will affect

managers' cognitive structure and value orientation,

and the values of the difference, the greater the risk

preference of executive team are more diversified

(Wang, Gu 2019), is not conducive to both agree in

high-risk investment, management when making

decisions, the opinions of decision-making

compromise tends to risk aversion; According to the

principal-agent theory, as the tenure of CEOS is

limited, it is very likely that short-term risk aversion

will occur and investment projects with positive net

present value will be abandoned (He, Yu, Yang 2019)

due to the consideration of personal reputation in the

industry and company performance during the tenure.

As the board of directors represents the rights of

owners, the interests of the two are in conflict to some

extent. The gap in political connection will

exacerbate the differences and conflicts between the

two. Existing studies have shown that the concurrent

role of directors and managers has a positive impact

on the level of enterprise risk taking.

Based on this, this paper proposes the following

assumptions:

H1: The greater the gap between the political

association between chairman and CEO, the lower

the level of corporate risk taking.

According to psychological analysis, men and

women have different risk preferences. Compared

with men, women are more conservative and care

more about the consequences of decisions. Men tend

to take risks and be radical in decisions, while women

tend to be conservative and steady (Wang, Yang 2010,

Yuan 2017). Therefore, in the case of the same gender,

the chairman and CEO are more likely to reach an

agreement on risk decision-making, while the gender

difference increases the differences between the two

due to the gap in political association, further

inhibiting the level of enterprise risk taking.

Therefore, this paper proposes the following

hypotheses:

H2: In the case of gender difference, the political

connection gap between chairman and CEO has a

more significant impact on corporate risk taking.

3 RESEARCH DESIGN

(I) Data sources and screening

The initial samples of this paper are a-share

manufacturing companies listed in Shanghai and

Shenzhen from 2016 to 2019. As this paper studies

the political relationship gap between chairman and

CEO, companies with two concurrent positions are

excluded.

According to the convention, the data should be

processed as follows :(1) ST type abnormal business

enterprises should be eliminated;(2) Samples with

missing data are removed. Finally, 1755 sample

observation values from 585 companies meeting the

conditions were obtained, and the continuous

variables were treated with 1% and 99% tail

reduction.

Among them, the data of chairman and CEO are

from The Database of Guotai 'an; the data of political

association are manually sorted according to the

annual report disclosed by Juchao and combined with

websites such as Sina Finance; and the data of

enterprise risk taking is from the WIND database.

(2) Variable selection and model design

1. Explained variable: Enterprise risk-taking.

In previous studies, the measurement indicators of

enterprise risk taking include: profit volatility (John

et al.2008, Facco et al.2011, yu minggui et al. 2013);

Enterprise R&D expenditure (Overseas returnee

executive Coles et al., 2006). The increase of

enterprise risk means the increase of uncertainty of

ICPDI 2022 - International Conference on Public Management, Digital Economy and Internet Technology

688

future cash inflow (Yu Minggui et al.). In this paper,

the volatility of enterprise profit is used as the

measurement index of enterprise risk taking. First, it

is necessary to adjust the annual ROA (profit before

interest and tax/total assets at the end of the year) of

each company with the average value of all listed

companies in the whole industry. To be specific, the

ROA of each company is subtracted from the average

value of the industry, and the difference is named

ROA_ADJ. Then, three years is taken as an

observation period. The standard deviation of ROA of

each listed company after industry adjustment during

the observation period was calculated to measure the

Risk level of the enterprise. Formula is:

𝑹𝒊𝒔𝒌=



𝟏

𝑵𝟏

∑

(𝐑𝐎𝐀_𝐀𝐃𝐉−

𝟏

𝑵

∑

𝑹𝑶𝑨_𝑨𝑫𝑱)

𝑵

𝒏𝟏

𝑵

𝒏𝟏

2. Explanatory variable: political correlation gap

(PCD).

In the previous studies on political correlation, the

measurement index mainly takes two forms: dummy

variable method and assignment method.

Because this article needs to be calculated,

chairman and CEO of specific political correlation

distance, so first assignment method is used to define

the chairman and CEO of political association,

concrete is divided into 6: served as the central unit 5,

the provincial units of 4, municipal units 3, county,

district units to 2, the villages and towns and the

following is 1, no political association of 0.

In the case of the same person serving in more

than one institution, the highest institution was taken

to calculate the difference between the two, and the

absolute value was taken as the specific political

correlation distance.

In addition, the non-zero values are all one, and

zero is not changed, as a measure of whether there is

a political correlation gap.

3. Control variables

Referring to a large number of previous studies on

enterprise risk taking, this paper sets the following

control variables: Roa (profit before interest and tax);

SIZE equals the natural logarithm of the company's

total assets at the end of the period. LEV, capital

structure, is equal to the ratio of ending total liabilities

to ending total assets; AGE is the number of years a

company has been listed, which is equal to the natural

log of the number of years a company has been listed

plus one. Ownership means that Ownership is equal

to the shareholding ratio of the largest shareholder at

the end of the year; Growth refers to the Growth of

the enterprise, which is equal to the annual Growth

rate of the enterprise's operating revenue.

In order to verify the hypothesis in this paper, the

following model is set according to Yu Minggui et al.

(2013):

𝑹𝒊𝒔𝒌= 𝜷

𝟎

+ 𝜷

𝟏

𝑷𝑪𝑫+ 𝜷

𝟐

𝑿+ ∑𝒀𝒆𝒂𝒓+ 𝜺

4 EMPIRICAL RESULTS AND

ANALYSIS

(1) Descriptive analysis

According to the final data results, in China's

listed manufacturing industry, the proportion of

companies with political association distance

between CEO and chairman is 46.23%, which

indicates that more than half of the companies have

the same level of political association between

chairman and CEO. The maximum value of

enterprise risk taking is 0.44, and the minimum value

is 0.0005. It can be seen that different manufacturing

companies have relatively large differences in risk

taking. From the perspective of ownership structure,

the average shareholding ratio of the first shareholder

is 0.31, which shows that the equity of listed

manufacturing companies in China is still highly

concentrated. From the perspective of company size,

the maximum value of the processed data on the total

assets of the company is 25.47 and the minimum

value is 20.01. It can be seen that there is an obvious

gap in the size of the design sample companies in this

research. In terms of the company's capital structure,

the maximum value is 0.838, and the minimum value

is 0.009. It can be seen that the asset-liability ratio of

listed manufacturing companies in China has a

significant difference, and its average value is 0.34,

which is very similar to previous research literature

(Yu Minggui et al., 2013) and is at a The table shows

the regression analysis of political relationship

distance and enterprise risk taking.

(2) Distance between enterprise risk taking and

political association

After adding all control variables and annual

dummy variables, the regression coefficient is -

0.0062, and is significantly negative at 5% level,

indicating that the political correlation gap between

CEO and chairman can significantly reduce the level

of risk-taking of enterprises, that is, companies are

more prone to give up those projects with high return

and high risk when facing investment decisions.

Hypothesis H1 is supported.

To political level correlation distance and the

enterprise risk for regression, test results show that in

the control variables and the annual virtual variables,

regression coefficient is 0.0022, and a significant at

1% level is negative, it further proves the hypothesis

H1, ask clear political relevance gap, the greater the

inhibition of risk bearing level of the enterprise, the .

The Political Association Gap Between Chairman and CEO and Corporate Risk Taking

689

Table 1: Results of regression analysis.

VARIABLES (1) (2) (3) (4)

PCD -0.002*** -0.002** -0.005*

(-3.01) (-2.07) (-1.69)

PCD1 -0.006**

(-2.38)

rowth -0.003 -0.001

(-0.16) (-0.18)

levera

e -0.008 -0.009 -0.014* -0.034

(-1.40) (-1.49) (-1.80) (-1.40)

roa 0.020* 0.020 -0.003 -0.092

(0.70) (0.70) (-0.09) (-1.00)

ownershi

0.012 0.000 0.010* -0.000

(0.49) (0.49) (0.86) (-0.09)

size 0.003** 0.003** 0.002 0.017***

(2.53) (2.50) (1.34) (3.46)

e 0.002 -0.007

(0.88) (-0.92)

Constant -0.025 -0.025 -0.024 -0.290***

(-1.10) (-1.08) (-0.64) (-2.85)

Yea

YES YES YES YES

Adj R-square

0.14 0.12 0.053 0.19

more significant, Hypothesis H1 is further supported.

Gender differences, political association gaps and

corporate risk-taking. Companies were divided into

two groups according to whether there was a gender

difference, and the group test showed that the

regression coefficient of PCD was -0.0051 and

significant at the 10% level when there was a gender

difference.

In the case of no gender differences, PCD

coefficient is 0.0023, the 5% significance level, the

above results showed that the gender differences will

increase the risk of political correlation distance to

the enterprise to undertake inhibition, gender

differences will increase the chairman and CEO

differences and contradictions, also disadvantageous

to the enterprises choose the net present value as the

orthometric risk project.

Let's say H2 is true. reasonable level (3)

Robustness test.

To test reliability research conclusion in this paper,

the practice of related research, this paper, replace the

enterprise risk measuring method, measured by ROA

of poor after industry adjustment, the regression

results confirmed that political correlation distance

(PCD) and associated levels (PCDD) and enterprise

risk exposures in 5% and 1% respectively with

significant negative abnormal level.

5 CONCLUSIONS AND

PROSPECTS

Taking gem listed companies as the research object,

this paper empiricistically studies the vertical pairing

characteristics between chairman and CEO based on

the high-ladder team theory:

The influence of political correlation difference

on the level of enterprise risk taking, and the direction

of gender difference in the role of the two, and finally

found that political correlation difference

significantly inhibited the level of enterprise risk

taking, and gender difference positively promoted

this effect. The results remained significant when

other measures were used to measure risk-taking.

Companies should pay attention to the political

connections between the chairman and the CEO when

hiring executives to take into account the level of

risk-taking at the company.

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