Causes and consequences of flocked resignations of independent directors: Inferences from firm impacts following Kangmei Pharmaceutical's scandal

Abstract

The monitoring role of independent directors could be compromised by weak legal environments and a lack of law enforcement, especially in emerging markets. We explore this issue by investigating the possible causes and consequences of large-scale resignations of independent directors across Chinese firms following Kangmei Pharmaceutical's financial scandal. We show that those resignations signaled potential problems for respective firms because those companies were more likely to be exposed to financial misconduct and experience poor stock performance. Our evidence suggests that holding independent directors accountable for negligence of duty is an essential component of corporate governance.