Overcoming the liability of origin by hiring foreign independent directors: Evidence from Chinese firms' cross-border M&As

Abstract

Firms from countries with weak corporate governance institutions tend to face liability of origin when they conduct cross-border mergers and acquisitions (M&As). We argue that they can overcome such challenges through hiring foreign independent directors (FIDs) as it can signal their commitments and efforts to align with international corporate governance standards. Based on a sample of Chinese listed firms between 2004 and 2017, we find that the FIDs have a positive impact on the likelihood of achieving cross-border M&As. Our mechanism tests show that FIDs could indeed facilitate firms' cross-border M&As through enhancing corporate governance practices as reflected by the adoption of Big 4 auditors and lower analyst forecasting errors. Moreover, the positive impact of FIDs is stronger for firms with higher state ownership, but weaker for firms with higher foreign ownership. Our findings are robust across a set of additional analyses.