Luh Luh Lan
A new regulation issued in the end of 2013 as part of the anti-corruption campaign in China leads to a wave of resignation of politically connected independent directors (PCID).I show that firms have large and significantly positive cumulative abnormal return around PCID resignations, suggesting that the agency cost effect of political connections dominate the value effect. Further, the mechanism of increase in firm value is shaped by firm’s ownership structure. Non-SOEs gain mainly because of lower risk, which provides novel evidence for the existence of priced political risk. Although SOEs do not decrease in political risk, they have better operating performance. Moreover, corporate governance improves after firms replace PCIDs, especially for SOEs, suggesting the anti-corruption campaign is authentic.
Associate Professor, National University of Singapore
Visiting Associate Professor of Finance, Kellogg School of Management