The Appointment And Resignation Of Politically Connected Independent Directors

Political connection is prevalent all over the world,and in the transition economy with a lack of formal institutions,firms are more motivated to establish political connection.China is the world's largest transition economy.In the process of reform and opening-up,Chinese economy develops rapidly with formal institutions lagging behind.The lack of formal institutions leads to the informal institutional arrangements--political connection.To some extent,political connection fills the gaps of formal institutions and accelerates the development of Chinese economy.In the meantime,firms with political connection also benefit a lot from this kind of informal institutional arrangements.Thus,the establishment of a political connection with government has become the core competitiveness of firms.In October 19,2013,the Organization Department of the CPC Central Committee issued a normative document,strictly prohibited party and government organs and leading cadres from holding a job in firms.This document forced a group of politically connected independent directors to resign.At that time,the capital market finally realized the politically connected independent directors had become a common channel for Chinese listed companies to establish a political connection.In order to study the cause and effect of politically connected independent directors,this paper studies the Chinese listed companies from 2011 to 2013 by using the method of empirical study.The research result shows that non-state-owned companies are more motivated to hire politically connected independent directors when faced with a lower level of property protection and financial development,while state-owned companies do not have this motivation.What's more,both non-state-owned companies and state-owned companies will hire politically connected independent directors when doing business in regulated industry.Then,this paper examines the relationship between politically connected independent directors and corporate value by collecting the resigning data of politically connected independent directors from October 19,2013 to December 31,2015.The research result shows that politically connected independent directors will do harm to corporate value of non-state-owned companies,while there is no evidence that politically connected independent directors have something to do with corporate value of state-owned companies.This paper has several contributions.First,this paper studies the causes and results of politically connected independent directors.Second,the paper tries to eliminate the endogenous problems in the research of independent directors.Third,the paper refines the background of independent directors and enrich the research on politically connected independent directors.