The Resignation Of Politically Connected Independent Directors And Enterprise Innovation

Along with the institutional background of China's economic transformation,how to improve the innovation capability of enterprises has become very important.However,Chinese companies themselves lack sufficient innovation impetus.In China,since the government controls most of the economic resources,and these resources are very important for the enterprise development,enterprises have strong incentives to hire officials as independent directors to acquire government resources and policies.Although their government networks can help companies gain a variety of benefits,such as preferential bank credit,more government subsidies or government contracts,they may also distort the company's normal investment behavior,curbing company's R&D resources and impeding innovation activities.On October 19,2013,the Central Organization Department issued the "Opinions on Further Regulating the Party and Government Leading Cadres' Part-time(Service)Issues in the Enterprise"(Central Organization Department(2013)No.18,referred to as "No.18"),party and government leading cadres who are presently employed and who do not hold office but have not finished the withdrawal(leaving)shall are not be allowed to work part-time(serve)in the company.They must strictly control the resignation of party officials or leading cadres who have resigned or left the government to work part-time.As a result,the provision caused the departure of a large number of independent directors with government official identity.The impact of this exogenous incident on the 18th document will cut off the channels for enterprises and officials to engage in political rent-seeking,and the companies that lose political resources may have a stronger incentive to innovate.In order to test the incentive effect of the resignation of official independent directors,based on rent-seeking theory,resource curse theory and championship theory,using financial data of listed companies from 2012 to 2016,using the methods of Difference-in-Difference,this paper tries to examine the impact of the resignation of official independent director on the company's innovation behavior by using the natural experiment in which independent directors who are formal government officials are forced to resign due to a CPC regulation.This article separately measures the innovation capability of the enterprise from the perspective of innovation input and innovation output.At the same time,it analyzes the impact of the resignation of independent directors on the innovation under different property rights and different institutional environments.The results of this study show that compared with the control group,the forced resignation of the official alone promoted the improvement of the enterprise's innovation level.Moreover,through the analysis of the heterogeneity effect,we found that the resignation of official independent directors of non-state-owned companies has a greater effect on the level of innovation than state-owned enterprises.In addition,in areas where government intervention is stronger,the resignation of official independent directors is more effective in encouraging innovation.The main research contributions of this paper are:(1)the current literatures have talked a lot about the economic consequences of building a political connection,while pay little attention to the loss of political connections.So,this paper investigates the economic consequences of the mandatory resign of independent directors with government official identity.(2)The previous studies on political connection measure whether or not the chairman and the general manager serve in government agencies,so that it ignores the effects of official independent directors,while the independent directors with official identity are also very important ways of establishing political relations.Therefore,this article which research of the independent directors with the background of the party and government leading cadres supplements and enriches the related areas of political connections and independent directors.(3)In the past,studies on the functions of independent directors in enterprises and the economic effects of establishing political connections have so far not formed a consistent conclusion.This is largely due to endogenous problems.This article takes the mandatory resignation of this(official)independent director as the entry point,provides a natural experiment to examine the influence of politically connected independent directors departure on corporate innovation decisions,and largely avoids the endogenous problems that exist in previous studies,contributes to a more robust conclusion.