Independent Directors’ Characteristics and Performance: Evidence from China

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.

Keywords: Independent director, Characteristic, Firm performance, China

JEL Classifications: G34, G38

Working Paper Series