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What’s the value of politically connected directors?

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  • Zhang, Karen
  • Truong, Cameron

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.

Suggested Citation

  • Zhang, Karen & Truong, Cameron, 2019. "What’s the value of politically connected directors?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(3).
  • Handle: RePEc:eee:jocaae:v:15:y:2019:i:3:s1815566919301031
    DOI: 10.1016/j.jcae.2019.100161
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    Keywords

    Political connection; Independent director; China; Exogenous shock; Event study;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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