The Brain Gain Of Corporate Boards: Evidence From China by SSRN

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Guanmin Liao

Central University of Finance and Economics – School of Accountancy

Xiaoyun Yu

Indiana University – Kelley School of Business – Department of Finance; China Academy of Financial Research (CAFR)

December 1, 2013

Journal of Finance, Forthcoming

Asian Finance Association (AsFA) 2013 Conference

ECGI – Finance Working Paper No. 343/2013


We study the impact of directors with foreign experience on firm performance in emerging markets. We use a unique dataset from China and exploit that at different times, Chinese provinces introduced policies to attract highly talented emigrants. These policies led to an increase in the supply of Chinese individuals with foreign experience in the local labor market and ultimately increased the likelihood that firms in these provinces had directors with foreign experience in comparison to similar firms elsewhere. We document that valuation, productivity, and profitability increase after firms hire directors with foreign experience. Furthermore, corporate governance improves and firms are more likely to make international acquisitions, to export, and to raise funds internationally. These findings suggest a channel through which the emigration of the best and brightest may lead to a brain gain and provide first time evidence on how board directors transmit knowledge on management practices and corporate governance to firms in emerging markets.

The Brain Gain Of Corporate Boards: Evidence From China – Introduction

The board of directors is expected to monitor and provide advice to management (Fama and Jensen (1983)). The extent to which boards fulfill these duties is widely debated and may largely depend on the characteristics and skills of the directors (Adams, Hermalin and Weisbach (2010)). The composition of the board may be particularly important in emerging markets, where firm performance is known to be hampered by weak corporate governance and poor management practices (Syverson (2011)). Board members with foreign experience could help to improve firm performance in emerging markets through at least three channels.

First, having learnt how foreign organizations work, directors with foreign experience may facilitate the adoption of superior management practices, which have been shown to greatly enhance firm performance and productivity (Bloom and Van Reenen (2007)). These directors could thus help to bridge the large productivity gaps that persist across countries and firms (Hall and Jones (1999); Jones and Romer (2009)). Second, directors with foreign experience may have connections in foreign countries that facilitate foreign acquisitions and international capital raising activities. Finally, directors with foreign experience may perform more effectively the monitoring function of the board and help to improve firm level corporate governance, not only thanks to the foreign expertise accumulated abroad, but also because, being relatively disenfranchised from local ties, they may have stronger incentives to pursue profitability rather than pleasing politicians and other local constituencies.

However, it is also possible that in environments with weak investor protection, the board of directors is captured by management and controlling shareholders and is therefore ineffective. Thus, the questions whether the board matters and how it affects corporate policies are particularly relevant for emerging markets.

This paper examines whether attracting exceptionally talented individuals with foreign experience to the board has positive effects on the performance of firms in emerging markets using a unique hand-collected dataset from China. China provides a unique environment to address these issues for the following reasons. First, Chinese firms face severe shortage of managers that can effectively work in an international environment (see, for instance, Farrell and Grant (2005)). Since individuals with foreign experience are scarce, not all firms with similarly high demand for directors with foreign experience are able to attract one. Second, individuals obtain their foreign experience in a variety of countries and we are able to hand-collect information on foreign education, work experience and other demographic characteristics from the bios of 32,823 executive and non-executive directors of 1,667 publicly listed companies from 1999 to 2009. This wealth of information allows us to explore how the directors’ foreign experience matters. Third, and most importantly, during the sample period, almost all provinces, at different times, introduced incentives for highly skilled individuals with foreign experience to return. We document that the labor market for board directors is largely local in China as in the US (Knyazeva, Knyazeva and Masulis (2013)). Therefore, the introduction of the provincial policies determined an exogenous change in the supply of potential directors with foreign experience for the firms headquartered in those provinces.

The timing of the introduction of the incentives was largely independent from the characteristics and growth opportunities of the publicly listed firms in the province. We show that after the policy changes, the number of directors with foreign experience increases more for the firms headquartered in the provinces adopting the policies than for comparable firms elsewhere. This is the case not only because some individuals return and become executive directors of the company, but mostly because there is a larger pool of individuals with foreign experience working in the area, who can become independent directors.

China Corporate Boards

See full PDF below.