Do politically connected independent directors matter? Evidence from mandatory resignation events in China

Lei Cheng and Zhen Sun

China Economic Review, 2019, vol. 58, issue C

Abstract: This paper investigates the contributions of politically connected independent directors to shareholder value by examining stock price reactions to their mandatory resignations. Employing an event study, we find that, if a private firm loses its politically connected independent director due to mandatory resignation, its stock price drops 4.61% on average within ten trading days, compared with control firms. We observe that, compared with independent directors from academia, politically connected independent directors are absent from more board meetings and are reluctant to express dissenting opinions even if they attend meetings. So the negative stock price reaction cannot be mainly explained by the loss of supervisory functions after politically connected independent directors were forced to resign from positions. By employing DID estimation, we further find that the economic benefits obtained by private firms decrease after the mandatory resignation. The heterogeneity and robustness checks further confirm that private firms indeed were unable to get the same amount of economic benefits from the government as before, which provides a reasonable explanation for the negative stock price reaction after mandatory resignations of politically connected independent directors.

Keywords: Independent director; Government official; Mandatory resignation; Stock price; Political connections (search for similar items in EconPapers)
JEL-codes: G14 L25 P26 P31 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:58:y:2019:i:c:s1043951x18300762

DOI: 10.1016/j.chieco.2018.05.011

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