1 Department of Management, Aarhus BSS, Aarhus University2 Shanghai Jiaotong3 Yunnan University of Finance and Economics4 Department of Management, Aarhus BSS, Aarhus University
Using a dataset of Chinese listed firms affiliated with state-controlled business groups, we examine how vertical interlocks of executives affect firm performance. We find that vertical interlocks of affiliated firm chairmen are positively associated with performance of the affiliated firms. Further, the positive effects of vertically interlocking chairmen decrease as the number of pyramidal layers increases or regional marketization index improves. Such positive effects of interlocks, however, become greater as the divergence between cash flow rights and control rights of business groups increases. Our findings are consistent with the hypotheses that vertically interlocking executives can increase firm value by providing better protection against political interference and expropriation by the ultimate controllers of business groups. Our study sheds new light in the role and function of interlocks and adds to a small body of literature on the dynamics of state owned business groups in emerging markets generally and China particularly.