Do politically connected independent directors create or destroy value?
Abstract We investigate whether politically connected independent directors (PCIDs), compared with other independent directors, create or destroy firm value and the channels through which they create or destroy firm value. Based on an exogenous regulatory change, we find that PCIDs—especially high level PCIDs—destroy firm value compared with non-PCIDs. The value-destroying effect is a net effect of: (i) PCIDs are less effective than non-PCIDs in monitoring managers, (ii) PCIDs do not differ from non-PCIDs in monitoring controlling shareholders, and (iii) PCIDs can divert political resources to a firm. However, PCIDs' value-destroying effect can be attenuated by effective external governance mechanisms (i.e., high levels of marketization and analyst coverage). Our results make a significant contribution to the literature and have important policy implications.