Are directors with foreign experience better monitors? Evidence from investment efficiency

Currently, most Chinese companies listed and traded on the Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) issue two classes of shares: A and B shares. A shares are domestic shares quoted in Chinese currency (RMB) and are restricted to domestic investors and qualified foreign institutional investors (QFIIs). B shares are foreign shares quoted in foreign currencies (U.S. dollars for Shanghai B shares and Hong Kong dollars for Shenzhen B shares). Until February 2001, B shares were available only to foreign investors. B-share companies might be more likely to employ directors with foreign experience and have different investment policies. To avoid the influence of B shares on our research question, our sample covers only A shares.

CSMAR divides all listed firm into four categories based on their equity nature, including, state-owned enterprises, private enterprises, foreign-owned enterprises and other. Foreign-owned enterprises are those established in China with capital invested by foreign investors, including joint ventures, cooperative enterprises and wholly foreign-owned enterprises, excluding the branches of foreign enterprises or other economic organizations in China. We exclude firms labelled as “Foreign-owned Enterprise” and “Other”. Our sample contains only state-owned firms and private firms.

ST (special treatment) stocks are stocks with abnormal financial conditions. *ST stocks fail to comply with certain rules imposed by the exchange during the period of being labeled as ST. These stocks are typically in financial difficulty.

This measurement is equivalent to capital expenditure (COMPUSTAT Item 128#) used by U.S.-based studies.

This test is motivated by the fact that in the Chinese context, Tobin’s Q may be an imperfect measure of investment opportunities.

We also use the industry-fixed effect, and our main conclusion does not change. The results are available upon request.

Because \(Leverage\) and \(Cash\) are used to construct \(Over\,\,Firm\), they are omitted from Eq. (2).

In this paper, the KZ index is calculated as: \(-9.352\times \left(Cash\,\,Flow/K\right)+\left(0.483\times TQ\right)+4.634\times Leverage-29.912\times \left(Dividends/K\right)-3.079\times \left(Cash/K\right)\).

This measurement is equivalent to capital expenditure (COMPUSTAT Item 128#) used in U.S.-based studies.

Thanks for the reviewer’s suggestion of identifying individual firms with changes in board members with foreign experience and use evidence from change analyses to provide stronger evidence. However, to employ this identification approach, we need firstly to identify individual firms with changes in board members with foreign experience and then compare the difference in investment efficiency of treated firm pre- and post-event. As shown in Eq. (1) in the main text, we measure firm’s investment efficiency as the sensitivity of investment expenditure to investment opportunities, which is the coefficient estimate obtained by regressing firm investment expenditure on investment opportunities. Therefore, to measure the investment efficiency of a firm that experiences a change event, we need sufficient number of observations for this specific firm both before and after the changes to make the regression analysis in Eq. (1) meaningful. That is, all firms must have sufficient number of observations during the pre- and post-event periods. However, constrained by our panel data set with data availability fixed to the period of 2008-2018, and some changes occur in the earlier years of the sample period, while others occur in the latter years, estimating investment efficiency for all firms with unequal number of observations (before and after the event) is statistically not feasible. Therefore, we are unable to conduct the change analyses as the reviewer suggested in our empirical framework.