Can a mighty dragon crush a snake in its old haunt? The impact of QFII on board independence in China

Abstract

This study analyzes whether local economic freedom affects foreign institutional investors' promotion of board independence. Using firm-level foreign institutional ownership data, together with an anti-corruption reform that increases local economic freedom in China, we find that the positive relationship between foreign institutional ownership and board independence has been strengthened after the reform. This is especially large in regions with worse economic freedom. Our findings indicate that local economic freedom is crucial in promoting board independence among foreign institutional investors. Our results are robust to the instrumental variable approach and the placebo test and hold by applying alternative measurements of regional economic freedom.