The effectiveness of the mandatory disclosure of independent directors’ opinions: Empirical evidence from China

Since 2001, the regulatory authority of the Chinese stock market has required the independent directors of listed firms to disclose their opinions on important board decisions. Using a novel dataset of independent directors’ opinions, this study examines the effectiveness of that mandatory disclosure requirement. We find that the stock market reacts negatively to announcements of independent directors saying ‘no’. Firms with more severe agency problems are prone to experiencing independent directors saying ‘no’. Independent directors are also more likely to say ‘no’ when they have multiple directorships, longer tenure, financial expertise, or live in places other than where the firms they serve are located. Consequently, firms with independent directors who say ‘no’ tend to experience cuts in inter-corporate lending, a lower propensity to pay dividends, reduced bank loans, and greater turnover of top executives. In addition, these firms are more likely to receive a modified audit opinion, obtain ‘special treatment’, or be subject to regulatory enforcement action in the year after independent directors say ‘no’. Overall, the results indicate that independent directors saying ‘no’ can help to protect the interests of outside investors, and thus lend support to regulations mandating the disclosure of independent directors’ opinions.