Resignation of officials as independent directors and firm performance

Ting REN*, Youzhi XIAO, Xinguo YU, Hongyan YANG, Jianmei GE

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

In 2013, the Chinese government implemented Rule No. 18, which suspended the directorships of incumbent government officials and precluded those who retired within the past three years from serving as independent directors for listed firms. The surprise implementation of Rule No. 18 triggered a wave of resignations among official independent directors (OIDs). The event provided a unique opportunity to examine the impacts of the political connections of board members on firm performance. We applied a difference-in-difference technique to empirically investigate the effect of OID resignations on firm performance from the perspectives of resource dependence theory and social capital theory. The results indicate that the resignation of OIDs had a significantly negative effect on firm performance, as measured by Tobin’s Q and firm leverage. This also confirmed the importance of independent directors’ political connection on firm performance, as discovered in prior research. However, this influence varied across OIDs’ heterogeneity, external environment and firm ownership. The results indicate that political connections may not be necessary channels for firms to achieve success.
Original languageEnglish
Article number23
JournalFrontiers of Business Research in China
Volume14
Issue number1
Early online date28 Oct 2020
DOIs
Publication statusE-pub ahead of print - 28 Oct 2020

Keywords

  • Firm performance
  • Independent director
  • Political connection
  • Resource dependence theory
  • Social capital theory

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