Independent Directors With Official Identity And Firm Performance

The independent director system is one part of the corporate governance.However,we still haven’t known whether they are effective or which role they play in.Since 2001,independent directors in China are often criticized of “vase”,“rubber stamp”,even though,scholars still try hard to find empirical evidence of independent directors’ effectiveness,our try is one of them.Since the Document No.18 of the Organization Department of the Central Committee of the CPC came up in October 2013,many independent directors have resigned from listed firms.This exogenous political shock created a good opportunity for independent directors research.First,using event study method,we find that investors don’t react negative to these resignations,nor they CARe about directors’ background.However,they CARe more about the information disclosure of the resignation announcement.Companies that disclose resignation reasons honestly receive more CARs.We explain this result for two reasons,first,investors reward these firms who disclose honestly,second,firms disclose reasons honestly deliver the positive information that they cooperate with the government policy initially.Furthermore,companies whose directors resign later have worse performances.This study proves that independent directors with official identity don’t affect firm value significantly,yet information disclosure and political sensitivity relate with firm performances.Then,we test the relationship between independent directors’ background and longterm firm performances,we find that independent directors with official identity don’t have significant relationship with firm performances,but firms with independent directors who have industry experience have better performances.What’s more,firms from which independent directors resign voluntarily have worse performances,this result illustrate that resignations of independent directors do deliver negative information of firms which directors used to work for.We also find that firms with independent directors who have official identity have higher subsidies,especially for private companies.We furthermore investigate which firms would like to hire independent directors with official identity,and the result shows that stated-owned enterprises with worse investment value are more likely to hire these directors.According to reputation hypothesis and busy hypothesis,we study the issue of multiple directorships,the result shows that multiple directorships don’t have significant relationship with firm performances,but resignations of busy directors receive more negative CARs,which support the reputation mechanism in some extent.We also find that older firms with better performances and higher pay are more likely to hire busy directors,and directors who have higher education level,professional background with economics or management or law,more social positions are more likely to hold more seats.Finally,we propose some policy suggestions according to our results,we believe this research has some reference value to this research area.