Do independent directors play a political role? Evidence from independent directors’ death events

Abstract

We propose that independent directors are likely to play a political role in an institutional setting featuring weak investor protection and strong government intervention. Using Chinese data for 2001–2014, we investigate whether the stock price reaction to an independent director’s death is related to his or her political connection. We find a stronger negative reaction to the death announcements of politically connected than politically unconnected independent directors. The magnitude of the reaction is positively related to directors’ political rank, and cannot be offset by their firms’ political capital. However, we document no evidence of politically connected independent directors exhibiting superior monitoring or consulting performance. Additional analyses show that firms are more inclined to appoint a politically connected independent director as a successor if his or her predecessor also had political connections. Our study broadens scholarly understanding of independent directors’ role in a non-Anglo-American setting.

Keywords

• Independent directors
• Political connections
• Political role