Are independent directors' political connections valuable? Findings based on a natural experiment in China

Purpose The purpose of this paper is to use difference-in-difference method (DID) to study the influences of independent directors' political connection on firm value. Design/methodology/approach File No. 18 by the Organization Department of the Communist Party of China Central Committee requires that the leading cadres in party and government offices are not allowed to act as independent directors; this restriction applies to retired officials as well. As a result, many listed companies lose the political connections of officers as independent directors. This paper takes it as an exogenous shock to evaluate the influence of the political connection of independent directors on firm value, effectively alleviating the endogeneity problem existing in previous studies. Findings The research finds the following: under the policy of compelled resignation, the loss of political connection of independent directors has a prominent negative impact on firm value; and compared to state-owned enterprises, the firm value of private enterprises receives a greater negative impact. However, the political advantage of state-owned enterprises is not obviously influenced. In the regions with worse external market environments, due to a greater reliance on resources brought about by political connection, the policy has a much greater influence on their listed companies. Social implications It enriches existing researches of the value of independent directors from the perspective of political connection, which is conducive to understanding the influence and channel on the firm value after the loss of political connection and the value of independent directors in the corporate governance in a more comprehensive and accurate manner. Originality/value This paper extends the relevant research on the value of the political connection of independent directors from the perspective of political connection and enlightens the evaluation of the effect of ban policies.