Are directors with foreign experience better monitors? Evidence from investment efficiency

Xueman Xiang (), Carl R. Chen (), Yue Liu (), Azhar Mughal () and Qizhi Tao ()
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Xueman Xiang: Chongqing University of Technology
Carl R. Chen: University of Dayton
Yue Liu: University of Edinburgh
Azhar Mughal: The Institute of Management Science
Qizhi Tao: Southwestern University of Finance and Economics

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 2, No 12, 799-840

Abstract: Abstract Using Chinese listed firms from 2008 to 2018, we find that directors with foreign experience alleviate both overinvestment and underinvestment, hence improve firms’ investment efficiency. The source of efficiency lies in better governance, which arises from the transfer of values and cognition, and advanced management practices across countries as well as greater independence as these directors with foreign experience have fewer local ties. Better governance helps mitigate agency problems and information asymmetry and relax firms’ financial constraints. Supporting this argument, we find that directors with foreign experience are associated with lower controlling shareholders’ tunneling transactions and lower investment—cash flow sensitivity. We further find that the impact of directors’ foreign experience on investment efficiency is more pronounced at firms with weaker corporate governance, less transparent information environment, higher financial constraints, and when foreign experience is gained in countries with better investor protection, superior management practices, better rule of law, and less corruption. Our finding is robust to alternative variable measurements and tests for endogeneity. Overall, this paper highlights the important monitoring role of directors with foreign experience, which promotes firm investment efficiency through various governance channels.

Keywords: Board directors; Foreign experience; Investment efficiency; Governance channel (search for similar items in EconPapers)
JEL-codes: G31 G34 O16 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01221-9

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