The Brain Gain of Corporate Boards: A Natural Experiment from China

Abstract

We study the impact of directors with foreign experience on firm performance in emerging markets. We use a unique dataset from China and exploit that at different times, Chinese provinces introduced policies to attract highly talented emigrants. These policies led to an increase in the supply of Chinese individuals with foreign experience in the local labor market and ultimately increased the likelihood that firms in these provinces had directors with foreign experience in comparison to similar firms elsewhere. We document that valuation, productivity, and profitability increase after firms hire directors with foreign experience. Furthermore, corporate governance improves and firms are more likely to make international acquisitions, to export, and to raise funds internationally. These findings suggest a channel through which the emigration of the best and brightest may lead to a brain gain and provide first time evidence on how board directors transmit knowledge on management practices and corporate governance to firms in emerging markets.