Board Hierarchy, Independent Directors, and Firm Value: Evidence from China

47 Pages Posted: 2 Aug 2015 Last revised: 10 Sep 2017

See all articles by Jigao Zhu

Jigao Zhu

University of International Business and Economics

Kangtao Ye

Renmin University of China - School of Business

Jenny Wu Tucker

University of Florida - Warrington College of Business

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Date Written: September 15, 2016

Abstract

While US companies mainly list their board of directors alphabetically, this is not the case for Chinese companies, most of which list their independent directors last. We interpret the listing order of Chinese directors as board hierarchy, reflecting power allocation within the board. Based on extant evidence that independent directors contribute to firm value and that empowered individuals have more influence in group decision making, we expect independent-director rankings to be positively associated with firm value and find evidence consistent with this prediction. In our supplementary analyses we explore the mechanisms through which empowered independent directors enhance firm value. We find that independent directors who are ranked higher are more likely to vote against the management, especially on financial reporting issues. Further, higher independent-director rankings are associated with less earnings management. Our study suggests that empowering independent directors increases firm value.

Keywords: corporate governance, independent directors, hierarchy, board

JEL Classification: G11, G14, G24

Suggested Citation

Zhu, Jigao and Ye, Kangtao and Tucker, Jenny Wu and Chan, Johnny, Board Hierarchy, Independent Directors, and Firm Value: Evidence from China (September 15, 2016). Journal of Corporate Finance, 2016, Vol 41: 262-279, Available at SSRN: https://ssrn.com/abstract=2638512 or http://dx.doi.org/10.2139/ssrn.2638512

Jigao Zhu

University of International Business and Economics ( email )

Room 412, Ningyuan Building
Huixindong street 10
Beijing, 100029
China

Kangtao Ye

Renmin University of China - School of Business ( email )

Beijing
China

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

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