Independent directors, information costs and foreign ownership in Chinese companies

This paper takes advantage of recent regulatory changes to estimate the effects of independent directors on company performance, taking into account information cost. Our data sample consists of 2371 firm-year observations for China over the period 1999-2005. Independent directors have a significantly negative impact on return on assets (ROA) and earnings per share (EPS), and this negative effect is more pronounced when the ability of the directors to perform their monitoring and advisory activities is curtailed by high information costs. We also find that foreign ownership may contribute to an increased willingness of firms to appoint independent directors.