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

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  • Cheng, Lei
  • Sun, Zhen

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.

Suggested Citation

  • Cheng, Lei & Sun, Zhen, 2019. "Do politically connected independent directors matter? Evidence from mandatory resignation events in China," China Economic Review, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:chieco:v:58:y:2019:i:c:s1043951x18300762
    DOI: 10.1016/j.chieco.2018.05.011
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    Cited by:

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    3. Cheng, Lei, 2022. "Political capital and physical capital: Substitute or complement? Evidence from China's anti-corruption campaign," Emerging Markets Review, Elsevier, vol. 51(PB).
    4. Ding, Haoyuan & Hu, Yichuan & Kim, Kenneth A. & Xie, Mi, 2023. "Relationship-based debt financing of Chinese private sector firms: The role of social connections to banks versus political connections," Journal of Corporate Finance, Elsevier, vol. 78(C).
    5. Wu, Yihan & Dong, Bin, 2021. "The value of independent directors: Evidence from China," Emerging Markets Review, Elsevier, vol. 49(C).
    6. Ting Ren & Youzhi Xiao & Xinguo Yu & Hongyan Yang & Jianmei Ge, 2020. "Resignation of officials as independent directors and firm performance," Frontiers of Business Research in China, Springer, vol. 14(1), pages 1-21, December.
    7. Xiao, Gang & Shen, Sichen, 2022. "To pollute or not to pollute: Political connections and corporate environmental performance," Journal of Corporate Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Independent director; Government official; Mandatory resignation; Stock price; Political connections;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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