The Resignation Of Politically Connected Independent Directors And Audit Quality

With the introduction and improvement of the independent director system,academic researches on independent directors has sprung up.As a protector of minority shareholders,independent directors should play its due supervisory function.However the current researches do not reach an agreement on the role of independent directors had made to company's corporate governance.The existing researches mainly probe into a series of indicators which are easy to collect and quantify,such as gender,age,educational background,and working experience of independent directors,while there are just few researches explored the politically connected independent directors and its economic consequences.In October 2013,the Organization Department of the Central Committee of the CPC issued a policy on standardizing the politically connected independent directors' part-time job,which led to a large amount of the resignation of politically connected independent directors.The large scale resignation of this independent directors provides us a good opportunity for studying the political consequences.Independent directors work as supervisors,who have the right to hire external auditors,so they play an important role in depending the audit quality.As political-connection is the invisible labels and resources for independent directors,Are this kind of independent directors able to play their supervisory functions better and improve audit quality better? All these questions need to be verified by empirical analysis.So based on this opportunity,we explore the relations between the resignation of politically connected independent directors and audit quality.At the same time,we divide the audit quality into perceived audit quality and actual audit quality.The perceived audit quality is from the perspective of the market investors,while the actual audit quality is from the real state of the enterprises.It can has a comprehensive measure to testify the relationship between the resignation of politically connected independent directors and audit quality while examining the perceived and actual audit quality together.In the study of perceived audit quality,we try to testify the market reaction due to the resignation of politically connected independent directors firstly,which is based on the event study,and then we use the ideas of DID to explore the relationship between the politically connected independent directors and perceived audit quality which is measured by Earnings Response Coefficients.We also adopt the ideas of DID and use logistic method to explain the relationship between the politically connected independent directors and actual audit quality which is measured by financial restatement.Our final results show that,with the resignation of politically connected independent directors,the market responds negatively and the perceived audit quality which is measured by Earnings Response Coefficients decreases significantly.While the actual audit quality which is measured by financial restatement don't cause a significant reduction.Our final conclusions are robust on the different measurement methods of perceived and actual audit quality.Lacking of effective communication between investors and listed companies,investors overvalued the political power so it causes the huge differences between the perceived feelings and actual states.The innovation of this paper are as follows:(1)from the perspective of audit quality,we explore the economic consequences of politically connected independent directors,so it will prolongs the study of corporate governance.(2)we divide the audit quality into perceived audit quality and actual audit quality to explore the different effect between politically connected independent directors and audit quality,so it will enrich and develop the study of influenced factors for audit quality.The final results have a significant meaning for evaluating the economic consequences of the forced resignation of politically connected independent directors from the perspective of audit quality and help policy makers perfect the independent directors system in China.