Two-tier corporate board structure, corporate governance reforms and financial performance of firms listed on the China stock market

Recently, in 2021 the standing committee of the Chinese Communist Party (CPC) 13th congress issued the draft amendment to the company law in order to strengthen corporate governance practices in China. It is therefore imperative that the likely effects of these corporate governance policy changes on financial performance be investigated. Specifically, the current study focuses on the implications of proposed changes to the board structure to scratch the upper limit board size (currently 13), scrap supervisors and allow small companies to operate without a board. Using a dynamic panel system generalized methods of moments (GMM) estimator to alleviate endogeneity concerns we determine the effect of the two-tier corporate board structure on the performance of a panel of 1256 Chinese listed firms from 2010 to 2018. The results of this study reveal that the two-tier board hypothesis is not efficient. Although the main board size and independence have positive effect on performance, supervisory boards have a negative effect on performance measured by both Tobin’s Q (TQ) and return on assets (ROA). We also observed that the main board meetings have a positive effect on performance contrary to the supervisory board. Furthermore, results reveal that boards are equally important for small firms as they are for larger ones. Our results support the removal of the cap on board size, the removal of the supervisory board, but do not support the removal of the main board for small firms.