Politically connected boards, value or cost

evidence from a natural experiment in China

Jianlei Han, Guangli Zhang

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This study investigates the net effect of a politically connected board for a firm. Using a natural experiment in China – a regulatory change to forbid bureaucrats from sitting on the board of public firms – we address the causality of the net effect of a politically connected board by testing the market reaction of the shares of firm targeted by the regulatory change to the policy announcement. The stocks of firms with politically connected directors who are targeted by the regulatory change show on average a significantly positive abnormal return, which suggests that the agency cost effect of a politically connected director dominates the value effect. The result is robust to various model settings and to a matched sample using the propensity score methodology. Additionally, the announcement effect of the resignation of a politically connected director is significantly positive, and significantly higher than that of a non-connected director. Overall, our results suggest that the agency cost effect of a politically connected director dominates the value effect.
Original languageEnglish
Pages (from-to)149-169
Number of pages21
JournalAccounting and Finance
Volume58
Issue number1
Early online date2017
DOIs
Publication statusPublished - Mar 2018
Externally publishedYes

Keywords

  • Political Connection
  • Outside Director
  • Regulatory Change
  • Resignations

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