Study On The Influences Of Information Cost On Independent Directors’ Function

In academia, the role of independent directors is widely concerned. Using theinformation asymmetry theory and principal-agent theory as the basic theories, thispaper will be propose that Independent directors who get more information can playthe role of independent directors better. In the corporate governance process, theseparation of ownership and management rights, as well as information asymmetrylead to the agency problems. Independent directors are used to solve agency problems,supervise and evaluate company’s managers. In2001, the China Securities RegulatoryCommission (CSRC) officially implements the independent director system in listedcompanies of Chinese. However, there is a dispute whether the independent directorsare playing an active role in the company. Thus, it is meaningful to research the roleof Independent directors. This paper attempts to study the information of Independentdirectors getting from the companies how to affect the role of them. We establishedassumptions, by the reaction of the market behavior to resignation of independentdirectors to measure whether the independent directors have effective functions.Studies suggest that independent directors who participate in the Special Committeeof the Board of Directors, the average number of the information was disclosured inpublic before the turnover of independent directors and the distance between theworking ground with the location of listed companies will affect the information costof independent directors. If the information cost is less,the market reaction issignificantly negative, Independent directors will be play the roles actively.The empirical results show that, if the independent directors participated in theBoard committees, the market reaction is significantly negative. However, thedistance and the number of information are not result in significant reaction in market.We can get conclusions from this paper: Independent directors participate in theSpecial Committee of the Board, the lower cost of information they get, marketinvestors believe that the resignation of independent directors is a loss for thecorporation. That’s to say, Independent directors played an actively role in thecorporation. However, the distance and the number of information don’t affect thefunctions of independent directors. In addition, according to the results of theempirical tests, we can find that the investors can make investment decisions byobserving the turnover behavior of independent directors.