Outside Directors Say No: Determinants and After-Effects

Abstract

Using a novel dataset of outside directors’ opinions from 2005 to 2009, we explore the determinants of outside directors’ saying ‘no’ and what happens after they say ‘no’ at board meetings in listed Chinese firms. We find that the firms with more severe agency problems between controlling shareholders and minority shareholders are prone to experiencing outside directors saying ‘no’. Outside directors are more likely to say ‘no’ when they have financial expertise, multiple directorships, relatively low remuneration, relatively long tenure, or live in places other than where the firms they serve are located. The stock market reacts negatively to announcements of outside directors’ saying ‘no’. Furthermore, firms are more likely to report poor operating and stock performance, receive a modified audit opinion, obtain “special treatment” and be subject to regulatory enforcement actions in the year following outside directors saying ‘no’.