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Abstract:
This paper explores the empirical results of the implementation of an independent director system in China. The results show that firms implement board independence by adding extra members, instead of removing inside directors, except in the case where the board size (before the recruitment of independent directors) has already been too large. It has been identified that large firms prefer a large board with more independent directors on the board. However, the largest shareholders have a strong incentive to organise a small and insider-controlled board. Although there is a negative relationship between board size, board independence and firm performance, Tobin's Q increases in relation to board size and board independence for large firms.
Corporate governance; Board structure; Firm performance; China
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Abstract:
Chinese listed firms recruit independent directors in order to build up connections with people who can provide useful sources and/or protection rather than for their monitoring of top managements. It is found that Chinese listed firms particularly prefer two types of Guanxi provided by independent directors: 43.76% of the independent directors are university scholars or researchers; and 13.88% of them are politically connected. Moreover, the relationship between Tobin’s Q and the presence of scholars and politically connected independent directors on boards is significantly negative. Furthermore, scholars, commercial bankers and politically connected independent directors can add value to large and diversified firms, high leveraged firms, and firms without political connections, respectively. Finally, the recruitment of independent directors does not reduce the related party transactions between the listed firms and their controlling shareholders, but instead, firms with politically connected CEOs, and firms with a government bureaucrat as the largest shareholder engage in less related party transactions.
Independent director, Characteristic, Firm performance, China
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