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

• Published in: Review of quantitative finance and accounting Vol. 62; no. 2; pp. 799 - 840
• Main Authors: Xiang, Xueman, Chen, Carl R., Liu, Yue, Mughal, Azhar, Tao, Qizhi
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.02.2024; Springer Nature B.V
• Subjects: Accounting/Auditing; Asymmetric information; Boards of directors; Cognition; Companies; Corporate Finance; Corporate governance; Corruption; Econometrics; Economics and Finance; Efficiency; Finance; Investments; Operations Research/Decision Theory; Rule of law; Stockholders; Transactions; China; Governance channel; G31; O16; Investment efficiency; Foreign experience; G34; Board directors
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-023-01221-9

Using Chinese listed firms from 2008 to 2018, we find that directors with foreign experience alleviate both overinvestment and underinvestment, hence improve firms’ investment efficiency. The source of efficiency lies in better governance, which arises from the transfer of values and cognition, and advanced management practices across countries as well as greater independence as these directors with foreign experience have fewer local ties. Better governance helps mitigate agency problems and information asymmetry and relax firms’ financial constraints. Supporting this argument, we find that directors with foreign experience are associated with lower controlling shareholders’ tunneling transactions and lower investment—cash flow sensitivity. We further find that the impact of directors’ foreign experience on investment efficiency is more pronounced at firms with weaker corporate governance, less transparent information environment, higher financial constraints, and when foreign experience is gained in countries with better investor protection, superior management practices, better rule of law, and less corruption. Our finding is robust to alternative variable measurements and tests for endogeneity. Overall, this paper highlights the important monitoring role of directors with foreign experience, which promotes firm investment efficiency through various governance channels.