The Relationship Between Board Independence And Firm Performance

With the development of the theory of corporate governance, its contents also are constantly expanding. Modern corporate governance has included the manager market, product market competition, debt and net asset value. After taking product market competition into the scope of the study of corporate governance, we found there are complementarities between the product market competition and corporate governance. When the degree of market competition is different, the effectiveness of corporate governance is different. Highly competitive markets will bring down the effectiveness of corporate governance in improving the company's performance. Based on the theoretical foundation, we take product market competition as a constraint condition to study the relationship between board independence and company performance, assuming that the governance theory to analyze the role of corporate governance would be different with the competition in different conditions, and different conditions of competition would affect the functions played by the independent directors.In this paper, we expanded the corporate governance factors and include the economics of industrial organization to study the relationship between the independence of directors and corporate performance. First of all, we introduced the origin and development of the independent directors system and the study of the relevance between the independence directors and company performance were reviewed at home and abroad. Then we introduced the related theories of the independent director system and the functions of independent directors, analysed that the product market competition affect functional play of independent directors, and make assumptions based on the analysis. After that, a multiple linear regression model was built in accordance with theoretical analysis. Finally, the markets were divided into competitively product market and less competitive product market in accordance with the main business profit margins and HHI, and before the end of 2003 in the Shanghai stock market listing of the 2004-2006 A-share listed companies were classified by industry to these two different degrees of market competition. Then we research the relationship between director independence and company performance by empiricaling the two groups of data respectively. Company Performance was measured with ROE, director independence was measured by one year lag independent director rate.The empirical results show that: board independence enhances firm performance among companies facing highly competitive product markets, while the agency theory can explain this phenomenon well. On the other hand, board independence reduces firm performance in industries with less competitive product markets, and the stewardship theory can explain this phenomenon well.