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 find while firms with PCIDs have negative cumulative abnormal return (CAR) around release of the new regulation, they have even larger positive CAR around announcement of PCID resignations, especially for non-SOEs. This is because firms with PCIDs have higher political risk after release of the regulation, but their political risk decreases after PCIDs resign and they are complied with the regulation. I also show operating performance does not change after PCID resignations, casting doubt on the “helping hand” theory of political connections. Moreover, corporate governance improves after firms replace PCIDs, especially for SOEs, suggesting the anti-corruption campaign is authentic.
Visiting Associate Professor of Finance, Kellogg School of Management
Associate Professor, National University of Singapore