What's the value of politically connected directors?

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Abstract

This study examines the stock price response to Document 18, a regulation released in China in 2013 requiring independent directors with political connections to resign from the boards of directors for publicly listed firms. We document a significant positive price response in the window surrounding the directive's promulgation date. This response is also of important economic magnitude. Our findings suggest that on average, the market views the costs of hiring politically connected directors as outweighing the associated benefits. Consistent with this view, we document that politically connected directors often shirk their board duties, as evidenced by their poor rates of attendance at board meetings. Further investigations show that the value decreasing effect of politically connected directors is apparent mainly for firms in regulated industries and varies with earnings management practices. However, the market views politically connected directors favorably if firms have significant business transactions with the government.

Original languageEnglish
Article number100161
Number of pages15
JournalJournal of Contemporary Accounting and Economics
Volume15
Issue number3
DOIs
Publication statusPublished - Dec 2019

Keywords

  • China
  • Event study
  • Exogenous shock
  • Independent director
  • Political connection

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