Independent directors are characterized by " native” risk-aversion effects during their work, but it doesn’t attract enough academic attention on how characteristics of independent directors affect corporate risk-taking in China for a long time. As we know, political connections among independent directors are common phenomena in China’s capital market, and it has exerted widespread and far-reaching impacts on the performance of independent directors. Based on the above, the article chooses political connections in transitional economy as a breakpoint, and uses A-share listed companies between 2007 and 2014 as samples to examine whether political connections of independent directors can make corporations take more risks. In particular, we measure political connections based on whether independent directors have the government background or act as NPC/CPC representatives and CPPCC members, and use accounting earnings (cash earnings) adjusted by the industry-year average as the proxy variable of the corporate risk-taking level. The empirical evidence shows that political connections of independent directors enhance risk-taking significantly. It indicates that when the number of independent directors with political connections increases, the corporate risk-taking level rises accordingly. Moreover, there is a moderating effect of demographic characteristics on the relation, which shows that when the education background becomes better and the female ratio increases, the enhancing degree of the corporate risk-taking level arising from political connections decreases, but the age doesn’t have significant impacts. Additional tests reveal that corporate risk-taking plays a partial mediation role on the relation between political connections of independent directors and operation performance. All of these mean that political connections can weaken risk aversion effects of independent directors; moreover, the relation is limited by demographic characteristics like the education background and the gender. Compared with the previous literature, the theoretical contributions of this article contain the following three points. First, the existing literature mainly analyzes the role of senior executives or CEOs in corporate risk-taking (Pathan, 2009; Yu, et al., 2013), and ignores independent directors. In fact, independent directors are more risk-sensitive in the decision-making process (Yu, et al., 2010), thus this article enriches the theory of corporate risk-taking. Second, the scope of political connections is limited to specific groups such as the CEO, the chairman, the board member, etc. (Fan, et al., 2007; Yu and Pan, 2008). The main body of political connections is extended to the independent director level in this article, which will help us to learn how the influence of political connections changes with the main body change. Finally, the article provides direct evidence on risk aversion of independent directors, which are quite different from indirect evidence in existing empirical literature. Above all, the article incorporates political connections and demographic characteristics into the analysis framework of how independent directors work, and is helpful for the comprehension on functions of independent directors in China’s context. According to the conclusion, we should pay attention to these following points in future: (1) Whether selecting independent directors with political connections depends on the demand of corporate development, for example, enterprises in quick development need a higher risk-taking level, so hiring independent directors with political connections will reduce frictions when communicating with top management. (2) Enterprises should take demographic characteristics into consideration when selecting independent directors. Based on the above discovery, if there is a need to decrease corporate risk-taking, enterprises can hire independent directors with higher education and female gender. (3) Independent directors don’t always play a " vase” role. Although listed companies are required to limit the proportion of independent directors to 1/3, there are still disparities among independent directors of the same proportion. Therefore, we should consider the tenure characteristics in the employment process of independent directors.
Do Political Connections of Independent Directors Increase the Corporate Risk-Taking Level?
Journal of Finance and Economics Vol. 44, Issue 08, pp. 141 - 152,封三 (2018) DOI:10.16538/j.cnki.jfe.2018.08.011
Du X Q, Zeng Q, Du Y J. Political connections, over-investment and corporate value: Empirical evidence from China’s state-owned listed companies[J]. Financial Research, 2011, (8): 93-110. (In Chinese)
He W F, Liu Q L. Study on the relation between background characteristics of top management and financial restatement in China’s listed companies[J]. Management World, 2010, (7): 144-155. (In Chinese)
Jiang F X, Yi Z H, Su F, et al. Study on the relation between background characteristics of top management and corporate over-investment behavior[J]. Management World, 2009, (1): 130-139. (In Chinese)
Li S H, Jiang X F, Song X Z. Top manager age and compensation: Theoretical approach and empirical evidence[J]. China Industrial Economics, 2015, (5): 122-134. (In Chinese)
Li S G. Female managers, over-investment and corporate value: Evidence from Chinese capital market[J]. Economic Management, 2013, (7): 74-84. (In Chinese)
Li W G, Yu M G. Nature of ownership, market liberalization, and corporate risk-taking[J]. China Industrial Economics, 2012, (12): 115-127. (In Chinese)
Li Y, Qin Y H, Zhang X F. Corporate property rights, background characteristics of manager and corporate investment efficiency[J]. Management World, 2011, (1): 135-144. (In Chinese)
Pan B, Jin W W. Transmission mechanism and effect of monetary policy on the interest rate of informal finance[J]. Economic Research Journal, 2017, (8): 78-93. (In Chinese)
Tang E Z. The impact of education degree and gender difference on the worker wages[J]. Statistical Research, 2012, (11): 67-73. (In Chinese)
Tang Q Q, Luo D L. Research on perception ability of risk and resignation of independent directors: Case study of Chinese listed companies[J]. Journal of Sun Yat-Sen University (Social Science Edition), 2007, (1): 91-98. (In Chinese)
Wang H C, Li Z J, Sun J. The influence of governance mechanisms on corporate value for enterprises listed abroad from the transmission effect of financing decisions perspective[J]. Accounting Research, 2008, (7): 65-72. (In Chinese)
Xing Q Q, Huang M L, Yi H R. The listed-company’s fraud in statement and the supervision and penalty of independent directors: An analysis based in the perspective of the individual independent director[J]. Management World, 2013, (5): 131-143. (In Chinese)
Xu N H, Jiang X Y, Yi Z H, et al. Do political connections affect the efficiency of legal enforcement?[J]. China Economic Quarterly, 2013, (2): 373-406. (In Chinese)
Yu M G, Li W G, Pan H B. Over-confidence of managers and corporate risk-taking[J]. Financial Research, 2013, (1): 149-163. (In Chinese)
Yu M G, Pan H B. The relationship between politics, institutional environments and private enterprises' access to bank loans[J]. Management World, 2008, (8): 9-21. (In Chinese)
Yu W F, Zhu K, Wang H M, et al. Playing safe on the board: The role of independent directors—Evidence from listed firms in China[J]. China Accounting and Finance Review, 2010, (3): 107-148. (In Chinese)
Zeng Y M, Zhang J S. The audit quality of membership of international accounting firms: Based on the preliminary research on the Chinese audit market[J]. Auditing Research, 2014, (1): 96-104. (In Chinese)
Zheng Z G, Liang X W, Huang J C. How should Chinese listed companies set incentive compensation contract for independent directors[J]. China Industrial Economics, 2017, (2): 174-192. (In Chinese)
Zhou Z J, Liu Z Y. The influence of independent directors’ local tenure on fraud of listed companies: Empirical evidence based on political connection and property rights[J]. China Soft Science, 2017, (7): 116-125. (In Chinese)
Zhou Z J, Liu Z Y, Hu R. CEO vs CFO: Can female executives restrain financial fraud?[J]. Journal of Shanghai University of Finance and Economics, 2016, (1): 50-63. (In Chinese)
Zhou Z J, Xiu Z F. Female Executives, macroeconomic environment and cash holdings[J]. Economics Survey, 2015, (4): 121-125. (In Chinese)
Zhu J G, Ye K T, Lu Z F. Who are more active monitors: Non-controlling shareholder directors or independent directors?[J]. Economic Research Journal, 2015, (9): 170-184. (In Chinese)
Almeida H, Campello M. Financial constraints, asset tangibility, and corporate investment[J]. Review of Financial Studies, 2007, 20(5): 1429-1460. DOI:10.1093/rfs/hhm019
Boubakri N, Cosset J C, Saffar W. The role of state and foreign owners in corporate risk-taking: Evidence from privatization[J]. Journal of Finance Economics, 2013, 108(3): 641-658. DOI:10.1016/j.jfineco.2012.12.007
Croson R, Gneezy U. Gender differences in preferences[J]. Journal of Economic Literature, 2009, 47(2): 448-474. DOI:10.1257/jel.47.2.448
Du X Q, Zeng Q, Du Y J. Do politically connected independent directors help Chinese listed private firms enter high-barrier industries?[J]. China Accounting and Finance Review, 2014, 16(4): 121-154.
Faccio M, Marchica M T, Mura R. Large shareholder diversification and corporate risk-taking[J]. Review of Financial Studies, 2011, 24(11): 3601-3641. DOI:10.1093/rfs/hhr065
Fan J P H, Wong T J, Zhang T Y. Politically connected CEOs, corporate governance, and Post-IPO performance of China’s newly partially privatized firms[J]. Journal of Financial Economics, 2007, 84(2): 330-357. DOI:10.1016/j.jfineco.2006.03.008
Francis B, Hasan I, Park J C, et al. Gender differences in financial reporting decision-making: Evidence from accounting conservatism[J]. Contemporary Accounting Research, 2014, 32(3): 1285-1381.
Goldman E, Rocholl J, So J. Do politically connected boards affect firm value?[J]. The Review of Financial Studies, 2009, 22(6): 2331-2360. DOI:10.1093/rfs/hhn088
Hillman A J, Dalziel T. Boards of directors and firm performance: Integrating agency and resource dependence perspectives[J]. Academy of Management Review, 2003, 28(3): 383-396. DOI:10.5465/amr.2003.10196729
Jayaraman S, Milbourn T T. The role of stock liquidity in executive compensation[J]. The Accounting Review, 2012, 87(2): 537-563. DOI:10.2308/accr-10204
Martin A D, Nishikawa T, Williams M A. CEO gender: Effects on valuation and risk[J]. Quarterly Journal of Finance and Accounting, 2009, 48(3): 23-40.
 Pathan S. Strong Boards, CEO power and bank risk-taking[J]. Journal of Banking & Finance, 2009, 33(7): 1340-1350.
Wang L H. Protection or expropriation: Politically connected independent directors in China[J]. Journal of Banking & Finance, 2015, 55: 92-106.
Cite this article
Zhou Zejiang, Ma Jing, Liu Zhongyan. Do Political Connections of Independent Directors Increase the Corporate Risk-Taking Level?[J]. Journal of Finance and Economics, 2018, 44(8): 141-152.
Previous: Study on Opportunity Inequality and Social Mobility Expectation: Empirical Analysis Based on CGSS Data