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The externality of politically connected directors’ resignations on peers’ cost of debt

Author

Listed:
  • Ting Liu

    (Xiamen University)

  • Shaoqing Kang

    (Shanghai Jiaotong University)

  • Lihong Wang

    (Xiamen University
    Xiamen University)

Abstract

Using a sample of Chinese listed firms from the Shanghai and Shenzhen Stock Exchanges from 2012 to 2018, we investigate the externality of the forced resignations of politically connected independent directors on the cost of debt for non-connected peers. Exploiting an exogenous shock caused by the 18th decree, we find that when politically connected independent directors resign from a Chinese listed firm, non-connected peers within the same industry experience a decrease in the cost of debt. Moreover, the sensitivity analyses further show that the above externality is more prominent in a subsample of Chinese listed non-SOEs, and in a subsample of Chinese listed firms operating in more competitive industries as well as in less developed financial markets, indicating that the externality is conditional on ownership type, industry competition and financial market development. Finally, further analyses show that peers tend to issue new debt after the political connection is disrupted. We also find that when peers have a higher creditworthiness and resignation firms have a lower creditworthiness, peers enjoy a lower cost of debt after resignations. These findings suggest that the resignations have a positive externality on peers’ cost of debt due to the elimination of preferential treatment and an improved resource allocation efficiency.

Suggested Citation

  • Ting Liu & Shaoqing Kang & Lihong Wang, 2024. "The externality of politically connected directors’ resignations on peers’ cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1191-1221, April.
  • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:3:d:10.1007_s11156-023-01232-6
    DOI: 10.1007/s11156-023-01232-6
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    More about this item

    Keywords

    Externality; Peers; Cost of debt; Politically connected independent directors; Resignation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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