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The Sunday Paper – Board Directors With Foreign Experience and Stock Price Crash Risk: Evidence From China

Academics have increasingly had a ‘thing’ for stock price crash risk. My guess is because the event has a nice definition working back to the causes is now easier due to better data than before? So, for example, we now know that younger and/or more confident CEOs lead to stock price crashes. So too do CEOs with a lot of stock options.

The literature also turns up things that help prevent stock price crashes and the paper highlighted today from Fang Cao, Jian Sun and Rongli Yen from the Hunan University, the Central University of Finance and Economics and the Renmin University is a contribution to that work.

No surprise. Companies with Directors on their Boards with experience overseas are less crash prone than ones with only domestically experienced managers; but why should this be so?

The researchers highlight how fertile a place China is for exploring this question as, relative to the population size, managers with overseas experience are still rare. The numbers are rising though. In 2000 2,000 overseas Chinese returned to China. In 2015 the number had risen to 410,000. From 1978 to 2015 four million Chinese went to study abroad and it’s estimated around 80% returned. What is it these overseas exposed folk bring to a company that reduces the risk of stock price crash risk though?

Academics believe crashes are all variations of the same problem; bad-news hoarding. When the dam bursts the effect is profound on the stock price. So, the trick is to stop the hoarding.

The paper uncovers two effects that retards bad-news hoarding that foreign experienced managers have on a company. The first is the  intuitive one of ‘imprinting’. Managers who’ve studied or worked overseas have been exposed to best practices that we know (from a mountain of academic literature!) act in a company’s long term best interest. They bring these practices home and this ‘imprinted’ knowledge results in better governance and disclosure.

The second effect is less intuitive. Companies with foreign exposed managers, it seems, attract more analyst coverage, the so-called ‘eyeball-effect’. Having more eyes trained on them makes it harder to sweep problems under the rug due to the, albeit forced, increased transparency. Intriguingly the researchers also ran a test for foreign exposed manager competency and couldn’t find a link. So just their presence is attracting interest not their real worth.

I was reminded at the end of the paper of a particularly withering remark from Mrs. G a long while ago. I had received a minor promotion and came home early, Krug in hand, to bask in the glow of my increased sense of self-worth. Her assessment, ‘They only gave you that job because you look good in a suit” was hard to hear at the time but, it seems now, she may have been on to something?! 😊

You can access the paper in full via the following link Board Directors With Foreign Experience.

Happy Sunday.

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