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Politically connected boards, value or cost: evidence from a natural experiment in China

journal contribution
posted on 2023-05-19, 07:31 authored by Han, J, Zhang, G
This study investigates the net effect of a politically connected board for a firm. Using a natural experiment in China – a regulatory change to forbid bureaucrats from sitting on the board of public firms – we address the causality of the net effect of a politically connected board by testing the market reaction of the shares of firm targeted by the regulatory change to the policy announcement. The stocks of firms with politically connected directors who are targeted by the regulatory change show on average a significantly positive abnormal return, which suggests that the agency cost effect of a politically connected director dominates the value effect. The result is robust to various model settings and to a matched sample using the propensity score methodology. Additionally, the announcement effect of the resignation of a politically connected director is significantly positive, and significantly higher than that of a non-connected director. Overall, our results suggest that the agency cost effect of a politically connected director dominates the value effect.

History

Publication title

Accounting and Finance

Volume

58

Pagination

149-169

ISSN

0810-5391

Department/School

TSBE

Publisher

Wiley-Blackwell Publishing Asia

Place of publication

Australia

Rights statement

Copyright 2016 AFAANZ

Repository Status

  • Restricted

Socio-economic Objectives

Finance services

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