The effect of geographic distance on independent directors’ performance from the perspective of inefficient investment

Abstract

Geoeconomics has attracted sustained attention in recent years, but the role of independent directors’ geographic distance in investment efficiency remains unexplored. We explore the governance effects of independent directors from a geographic location perspective. Specifically, the Great Circle Distance Formula is employed to calculate the geographic distance between the independent directors and the enterprise. Then, we measure the inefficient investment. Using a detailed sample in the Chinese market from 2009 to 2018, we find that geographic distance is not conducive to the functioning of independent directors and that there is a positive relationship between independent directors’ geographic distance and inefficient investment. The coefficients are robust to multiple robustness checks. In addition, the positive effect of independent directors’ geographic distance on inefficient investment will increase (become more positive) when there is no high-speed rail and the marketisation process is low in the enterprise’s location. Mechanism tests show that geographic distance does affect inefficient investment by inhibiting independent directors’ access to information as well as their reputation. Our results have important implications for investment policy and corporate governance.