Three essays on corporate independent directors in emerging markets

Abstract

This dissertation investigates the impact of independent directors’ connections to a powerful third party such as the state on (1) independent directors’ monitoring, (2) directors’ career outcomes and (3) corporate donations. Study 1 (Chapter 3) investigates how the power relationship between independent directors and (majority) shareholders impact independent directors’ monitoring. By exploiting a director-level dataset, this study finds that directors’ connections to a powerful third party such as the government countervail the influence of majority shareholders and thereby positively influence their monitoring. However, independent director compensation associated with dependency asymmetry negatively affects their monitoring. Study 2 (Chapter 4) extends research on directors’ monitoring by investigating whether directors will be rewarded for their effective monitoring. Drawing upon signalling theory, I posit that diligent monitoring, despite the same type of signal, is evaluated differently by varying groups of stakeholders and in turn influences directors’ careers. Specifically, diligent monitoring is not positively evaluated by the focal firm, as reflected by directors’ lower probability of re-appointment after current director term expires. However, diligent directors are rewarded for their duties in the form of more new board seats. Moreover, for directors with connections to the state, diligent monitoring is also rewarded as this is consistent with the state’s interests. Study 3 (Chapter 5) examines heterogeneous political connections and their impacts on corporate social responsiveness (i.e. donation). Using data on earthquake donations by Chinese publicly listed firms in 2008, I show that firms with higher proportions of directors embedded in the political system will donate less, due to the fact that disaster relief efforts, viewed as the state’s responsibility, may de-legitimize the state. However, firms with higher proportions of directors peripheral in the political system will donate more due to public pressure for corporate social responsibility. This study provides insights into the nature of political connections and enriches our understanding of corporate social responsiveness in the context of emerging economies.