Independent director licensing and stock price crash risk

This paper examines how independent director licensing affects firms’ stock price crash risk. Exploiting the regulatory qualification certificates for being an independent director in China, we find higher future stock price crash risk in firms with uncertificated independent directors (UIDs), compared with firms having all independent directors granted qualification certificates. Further analyses suggest that UIDs are less motivated to fulfill fiduciary duties due to insufficient awareness of legal responsibilities and less independence in monitoring insiders to show their gratitude. Firms with UIDs are also less likely to issue bad news forecasts and are associated with lower-quality information disclosure. The cross-sectional analyses show that the effect of UIDs is stronger in firms with more severe agency conflicts and weaker external monitoring. Additionally, the impact of UIDs intensifies in firms with higher information asymmetry and when UIDs serve on audit committees, but is mitigated when they have foreign experience. The results suggest that the certification plays a more pronounced role in settings where investor protection institutions are weaker and effective governance mechanisms are insufficient. Overall, our findings highlight the legitimacy of independent directors as an important factor when evaluating their governance effect and stock price outcomes.