Jumping Off Before The Ship Sinks: Independent Director Departure In China's Listed Companies

Drawing upon the logic of stigmatization, previous studies have demonstrated that independent director departure is more likely to occur after a negative event such as poor firm performance, scandal, and accounting irregularity. In this study, we propose that equipped with (better) inside information, independent directors may foresee looming problems and leave the board before poor performance occurs so that they won’t be stigmatized by the firm’s poor performance. We test this idea by taking advantage of the unique regulation on China’s publicly-listed companies, where an independent director can serve on a firm’s board for a maximum of two terms, which has three years. With data on 6,765 firm-year observations of non-financial companies listed in China’s stock exchanges in 2005-2009, we find that non-mandatory independent director departure--i.e., resignation during a term, or departure upon the completion of the first term--is associated with subsequent performance decline; whereas mandatory independe...