What’s the value of politically connected directors?

Karen Zhang and Cameron Truong

Journal of Contemporary Accounting and Economics, 2019, vol. 15, issue 3

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.

Keywords: Political connection; Independent director; China; Exogenous shock; Event study (search for similar items in EconPapers)
JEL-codes: G14 G18 G38 K23 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:15:y:2019:i:3:s1815566919301031

DOI: 10.1016/j.jcae.2019.100161

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