Does the Reputation of Independent Non-Executive Directors Matter: Evidence from Hong Kong

Abstract

In response to recent corporate scandals, shareholders and regulators around the world are demanding greater corporate transparency. If indeed, as is often stated, the Independent Non-executive Directors (INED) can play an important role in monitoring management and enforcement of transparency, then do INEDs' personal reputations matter? This paper examines shareholders' response to appointments of INEDs in Hong Kong - a society where corporate ownerships are concentrated and personal reputations are highly valued. We find that prestigious individuals are positively related to less risky and better performing firms. We also find appointments of prestigious INEDs are associated with smaller IPO underpricing, and the market reacts positively to the new non-replacement appointments of less-busy prestigious INEDs. However, the market seems to be indifferent to reputation of INEDs that replace other INEDs. These results extend the reputation capital literature by providing evidence on the role INEDs in certifying and signaling the quality of firms.