Why do companies appoint independent directors having professional legal expertise?

Weifeng He and Wei Liu

China Journal of Accounting Studies, 2016, vol. 4, issue 4, 379-405

Abstract: Understanding the role of the independent director is an important branch of corporate governance study, and the analysis of the independent director system from the perspective of a professional background constitutes an important part of recent theoretical research. This paper attempts to uncover the underlying motivations for Chinese listed companies to engage independent directors having professional legal expertise and to analyse the associated economic consequences. We find that Chinese listed companies engage independent directors mainly for consulting rather than for supervisory purposes; if a company is bound up in such activities as a lawsuit, dividend distribution, equity transfer or asset acquisition, it would be more likely to hire independent directors of legal expertise; and when a company is considering hiring independent directors, it would prefer those independent directors reputed to have professional legal expertise and extensive practical experience. We further find that the listed companies which hire independent directors having professional legal expertise generally have a higher market value. This paper not only contributes to the literature of the professional background of independent directors but also extends the literature of law and finance. In addition, it provides new inspiration on how to improve listed companies’ governance efficiency.

Date: 2016
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DOI: 10.1080/21697213.2016.1251770

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