Board directors with foreign experience and stock price crash risk: Evidence from China

Abstract

This study examines the impact of board directors with foreign experience (BDFEs) on stock price crash risk. We find that BDFEs help reduce crash risk. This association is robust to a series of robustness checks, including a firm fixed effects model, controlling for possibly omitted variables, and instrumental variable estimations. Moreover, we find that the negative association between BDFEs and crash risk is more pronounced for firms with more agency problems, weaker corporate governance, and less overall transparency. Our findings suggest that the characteristics of board directors matter in determining stock price crash risk. K E Y W O R D Sboard directors, foreign experience, monitoring role, stock price crash risk

Impact of the Foreign Experience of Board Directors on the Performance of Publicly Traded Brazilian Companies

“…However, we exclude non-industrial firms as they have different characteristics related to accounting principles and financial attributes, and companies with Tobin´s Q less than zero and greater than ten, in order to eliminate outlines from the analysis. These actions were taken to avoid possible bias, following several authors who made similar exclusions, such as Cao et al (2019), Choi et al (2012), and Almeida and Campello (2007). The period of the analysis is from 2010 to 2016, due to the disclosure of the information regarding the members of the board through the reference forms of the Brazilian Securities and Exchange Commission (CVM).…”

“…Directors with experience abroad would be concerned with the reputation and awareness of Corporate Social Responsibility (Zhang et al, 2016), posi- tively influencing the tax policy of firms (Wen et al, 2020). The knowledge accumulated abroad improves the monitoring capacity, reducing the volatility of the companies' share prices (Cao et al, 2019), increasing the levels of transparency and disclosure of information, and interfering in the involvement of directors in ties and local power networks (Liao et al, 2017). However, the cultural distance from the local context hinders the analysis and judgment of financial information, limiting the monitoring capacity of foreign directors (Liao et al, 2017).…”

“…Thus, we suggest that the investment in board foreign experience of publicly traded companies in Brazil would be an institutional isomorphism, where having an experience abroad, whether professional or academic, would be a myth, a status already institutionalized by Brazilian society. Another possible explanation is the questionable effectiveness of boards of directors in countries with a concentrated control structure and weak legal protection for shareholders (Cao et al, 2019). In Brazil, the formation of the board of directors is mandatory by law in publicly traded companies, but the cases of highly effective boards in Brazil are rare (Sonza & Kloeckner, 2014).…”

“…We argue that investing in the foreign experience of the board members would be an institutional isomorphism, a ritual institutionalized by the Brazilian society, corroborating with Dimaggio and Pawell's (2005) findings. Another point that we defend, in compass with Cao et al (2019), is that the lack of effectiveness of the board of directors can help to understand the negative relationship between the foreign experience of the directors and the performance of the firms.…”

“…In the Chinese market, empirical studies suggest that the foreign experience of board members will positively impact ISSN 1678-6971 (electronic version) • RAM, São Paulo, 22(3), eRAMF210152, 2021 doi:10.1590/1678-6971/eRAMF210152 corporate performance (Giannetti, Liao, & Yu, 2015), innovation process (Yuan & Wen, 2018), and corporate social responsibility (Zhang, Tang, & Lin, 2016). Directors with foreign experience make better tax policy decisions (Wen et al, 2020), increase levels of transparency (Liao et al, 2017), and reduce the volatility of firms' share prices, especially in countries with weak corporate governance (Cao, Sun, & Yuan, 2019). However, they would be removed from their local context, which could impair the judgment of financial information, leading to greater influence from the chief executive officer (CEO) and majority shareholders (Liao et al, 2017).…”