Journal of Financial Economics 138 (2020) 483–503

Contents lists available at ScienceDirect

Journal of Financial Economics

journal homepage: www.elsevier.com/locate/jfec

Board structure, director expertise, and advisory role of

outside directors ✩
Sheng-Syan Chen a, Yan-Shing Chen b, Jun-Koo Kang c,∗, Shu-Cing Peng d
a
Department of Finance, National Chengchi University, Taiwan
b
Department of Finance, National Taiwan University, Taiwan
c
Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore
d
Department of Finance, National Central University, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: We investigate how a shock to corporate demand for experienced directors (i.e., U.S.
Received 26 August 2019 Congress’ grant of Permanent Normal Trade Relations status to China in 20 0 0) affects U.S.
Revised 25 October 2019
firms’ board structure and board advisory role. We find that firms appoint more outside
Accepted 31 October 2019
directors with China-related experience after the grant. Firms with such directors realize
Available online 23 May 2020
higher returns around announcements of investments involving Chinese firms and bet-
JEL classification: ter post-deal operating performance, particularly when these directors reside in the U.S.
G14 The appointment of directors with China experience is also greeted more positively by the
G32 stock market and they gain more board seats after the grant.
G34
© 2020 Elsevier B.V. All rights reserved.
O24

Keywords:
Permanent normal trade relations
China-related experience
Board structure
Advisory role
Director labor market

1. Introduction the literature on boards of directors. Evidence on these

The effects of board structure and director expertise
on firm performance and policies are central questions in
✩
We are especially grateful to the referee, Michael Weisbach, for his
valuable advice. We also thank Alexander Ljungqvist, Jerry Parwada, John
Wei, William Schwert (editor), and seminar participants at Nanyang Tech-
nological University, National Central University, National Chiao Tung Uni-
versity, National Tsing Hua University, and Yuan Ze University for their
useful comments. We are also grateful to participants at the 2018 Doctoral
Symposium of National Taiwan University. Sheng-Syan Chen, Yan-Shing
Chen, and Shu-Cing Peng gratefully acknowledge financial support from
E.SUN Commercial Bank and the Ministry of Science and Technology in
Taiwan (MOST 106–2917-I-002–021), respectively. All errors are our own.
∗
Corresponding author.
E-mail addresses: sschenfn@nccu.edu.tw (S.-S. Chen),
yanshing@ntu.edu.tw (Y.-S. Chen), jkkang@ntu.edu.sg (J.-K. Kang),
waterwaterw@gmail.com (S.-C. Peng).
questions, however, is mixed,1 due largely to the endoge-
nous nature of board structure, which leads to biased
estimates and thus makes the results in prior studies
difficult to interpret (Hermalin and Weisbach, 1998, 2003).
We also have limited evidence about the channels through
which director expertise affects firm value and the circum-
stances under which firms can benefit from the advisory
1
For example, while some studies find that outside directors add value
to firms (e.g., Weisbach, 1988; Rosenstein and Wyatt, 1990; Brickley et al.,
1994; Cotter et al., 1997; Dahya et al., 2008; Duchin et al., 2010; Fauver
et al., 2017), others find a negative relation (e.g., Bhagat and Black, 2002;
Duchin et al., 2010) or no significant relation (e.g., Mehran, 1995; Klein,
1998) between board structure and firm performance.

https://doi.org/10.1016/j.jfineco.2020.05.008
0304-405X/© 2020 Elsevier B.V. All rights reserved.
484 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
Fig. 1. Imports from China by manufacturing firms in the U.S. and eight other high-income countries. This figure depicts the value (in billions of 2007
dollars) of imported items from China from 1991 to 2011 by manufacturing firms in the U.S. (solid line) and eight high-income countries including Australia,
Denmark, Finland, Germany, Japan, New Zealand, Spain, and Switzerland (dashed line).
role of directors with relevant expertise without losing
monitoring efficiency.2
In this study we use a trade policy shock that affects
corporate demand for qualified directors as an exogenous
source of variation in board structure to provide new ev-
idence on these important questions. Specifically, we use
U.S. Congress’ grant of Permanent Normal Trade Relations
(PNTR) status to China in 20 0 0 as a quasi-policy shock to
corporate demand for outside directors with China-related
experience (hereafter “directors with China experience”)
and investigate how such a shock affects U.S. firms’ board
structure, board advisory role in investment decisions
involving Chinese firms, and the assessment of directors
with China experience in the stock market and the director
labor market.
In October 20 0 0, U.S. Congress granted PNTR status to
China effective upon China’s admission to the World Trade
Organization (WTO) in December 2001. The passage of
PNTR, which permanently set U.S. duties on Chinese im-
ports at normal trade relations (NTR) levels, eliminated the
possibility of sudden tariff spikes on Chinese imports and
thus provided Chinese firms with greater incentives to en-
ter the U.S. market.3 Indeed, as shown in Fig. 1, the dollar
amount of imports from China by U.S. manufacturing firms
has increased substantially since 2001. At the same time,
2
Faleye et al. (2011) show that the improvement in board monitor-
ing quality comes at the cost of directors’ weaker strategic advising and
Masulis et al. (2012) find that foreign independent directors’ valuable ad-
visory services come at the cost of weaker monitoring.
3
In 1980, U.S. Congress granted China conditional NTR (also known as
most favored nation (MFN)) status, which was subject to annual renewal.
See Section 2 below for background on NTR policy.
the passage of PNTR provided U.S. firms with new business
opportunities by eliminating investment uncertainty in
China and increasing their incentives to exploit China’s
cheaper labor and growing markets by shifting operations
to China or by establishing new business relationships with
Chinese firms (Pierce and Schott, 2016; Antràs et al., 2017).
However, U.S. firms entering the Chinese market face
significant challenges due to fundamental differences in
language, legal and political landscape, and customer
preferences from those in the U.S. To overcome their lack
of knowledge about the social norms and regulatory envi-
ronment in China and to develop a network in China, U.S.
firms entering the Chinese market may have strong incen-
tives to appoint directors with China experience, as they
can help firms make informed decisions on China-related
matters. For example, U.S. firms undertaking mergers
and acquisitions (M&As), joint ventures (JVs), or strategic
alliances (SAs) in China have to engage in a considerable
amount of communication and coordination with the
management of Chinese targets/partners and thus need
substantial country- and firm-specific knowledge. Direc-
tors with China experience can play an important advisory
role by helping U.S. firms select Chinese targets/partners,
facilitating human resource integration between U.S. and
Chinese firms, and reducing post-investment culture clash
and legal problems.4
4
On September 15, 2005, Applied Materials announced the appoint-
ment of Charles Liu, who previously advised several U.S. firms in devel-
oping and executing business strategies in China, as an outside director.
The announcement stated that “we believe that Charles’ business expe-
rience and global perspective will be valuable assets for Applied as we
continue to pursue our global growth and our expansion in China” (“Ap-
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
We examine this value-enhancing role of directors with
China experience using 14,199 firm-year (17,952 outside
director) observations for U.S. manufacturing firms from
1996 to 2011. Following Pierce and Schott (2016), we use
NTR gap 1999 to capture the extent to which an industry
is influenced by the passage of PNTR. NTR gap 1999 is
the difference between the non-NTR rate to which tariffs
would have risen if the annual NTR rate had not been
renewed and the NTR tariff rate set by PNTR in 1999, the
year prior to the passage of PNTR. Using the ad valorem
equivalent NTR and non-NTR tariff rates from Feenstra et
al. (2002), we measure NTR gap 1999 for each four-digit
Standard Industrial Classification (SIC) industry as the
average NTR gap 1999 across the eight-digit Harmonized
System product lines matched to that industry. We expect
U.S. industries facing a high NTR gap 1999 to be associated
with greater investment uncertainty in China and thus to
be influenced more heavily by the passage of PNTR. Con-
sistent with this prediction, our difference-in-differences
analysis shows that the proportion of directors with China
experience on the board increases significantly more for
U.S. firms in high-NTR gap industries than for those in
low-NTR gap industries after the passage of PNTR: moving
from an industry at the 25th NTR gap percentile to an
industry at the 75th NTR gap percentile of the observed
distribution leads to an increase in the proportion of direc-
tors with China experience of 0.21% after 1999. Given that
the average proportion of directors with China experience
across the full sample is 0.22% in 1999, this result suggests
that the impact of the passage of PNTR on the demand for
directors with China experience is economically large and
significant.
We conduct several robustness tests to ensure that the
positive effect of PNTR on the proportion of directors with
China experience is not spurious. First, following Autor et
al. (2013) and Pierce and Schott (2016), we use the ratio of
imports from China by U.S. firms to U.S. domestic absorp-
tion (i.e., industry shipments plus imports minus exports)
in 1991 (China import penetration (CIP)), which captures
the scale of production shift and investment in China by
U.S. firms, as a measure of the importance of the passage
of PNTR for U.S. firms.5 Consistent with our prediction, we
find that the coefficient on CIP is positive and significant.
Second, we use the Smoot-Hawley-based non-NTR tariff
rate in 1990, which did not change much compared to the
value initially set in 1930, as an instrumental variable for
NTR gap 1999. Our results do not change. Third, we employ
a matching approach whereby we match each firm in the
high-NTR gap group to a firm in the low-NTR gap group
using firm and director characteristics in 1999. The results
again remain unchanged.
Next, to examine whether directors with China experi-
ence increase U.S. firms’ value and operating performance,
plied Materials adds two members to Board of Directors,” Business Wire,
September 15, 2005). This anecdote suggests that a firm hires outside di-
rectors with regional experience to obtain valuable advisory services from
them.
5 tition, they focus mainly on negative effects such as the
We scale China imports in a given year by domestic absorption in
1991 because contemporaneous domestic absorption may be endogenous
to China imports.
485
we focus on investment decisions in which these directors
are expected to perform an important value-enhancing
advisory function. Specifically, we examine the valuation
effects of directors with China experience on U.S. firms’
cross-border M&A, JV, and SA activities involving Chinese
firms (China deals) and their post-deal long-term operating
performance. We find that after controlling for various
firm, governance, and board characteristics, U.S. firms with
a higher proportion of directors with China experience on
the board realize higher three-day cumulative abnormal
returns around China deal announcements (CARs (−1, 1))
than those with a lower proportion of directors with China
experience on the board. These firms also experience
a larger improvement in post-deal long-term operating
performance. To mitigate confounding effects of board
structure endogeneity, we conduct instrumental variable
regressions of CAR (−1, 1) and long-term operating perfor-
mance where we instrument the proportion of directors
with China experience by the number of immigrants from
China in the state in which the firm is headquartered. We
find that our main results continue to hold.
To provide further evidence to support the view that
directors with China experience add value to U.S. firms,
we examine how the appointments of these directors are
perceived by the stock market and how they are rewarded
in the director labor market. We find that the market’s ex-
ante assessments of director appointment announcements
are more positive for directors with China experience than
for directors without such experience. We also find that
directors with China experience obtain more directorships,
particularly in firms in high-NTR gap industries, after
the passage of PNTR than matched directors without
such experience. Thus, the unique role and expertise of
directors with China experience in implementing a firm’s
value-enhancing strategies are assessed positively by the
stock market and the director labor market.
Finally, we examine whether the value-enhancing role
of directors with China experience is different between
the directors who reside in the U.S. (Resident directors)
and those who reside in foreign countries (Nonresident
directors). We find that compared to U.S. firms that do not
have any directors with China experience on the board,
those with a higher proportion of Resident directors with
China experience realize higher abnormal returns around
announcements of China deals and better post-deal oper-
ating performance, while those with a higher proportion
of Nonresident directors with China experience do not.
Consistent with Masulis et al. (2012), we also find that
Nonresident directors with China experience are more likely
to be absent in board meetings and that firms with a
higher proportion of such directors are more likely to
engage in financial restatements. However, we do not find
such results for Resident directors with China experience.
Thus, the value-enhancing effect of directors with foreign
experience comes mainly from local directors.
Our study contributes to the literature in several ways.
First, while previous studies examine the effects of China’s
admission to the WTO on labor markets and firm compe-
contraction in manufacturing employment (e.g., Bernard
et al., 2006) and the decline in firms’ profitability and
486 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
investment (e.g., Hombert and Matray, 2018). To the best
of our knowledge, the only studies to date to investigate
how firms have exploited new opportunities in China
arising from the passage of PNTR are Pierce and Schott
(2016) and Antràs et al. (2017), both of which find evi-
dence of within-firm relocation of U.S. production to China
after China’s admission to the WTO. We contribute to
this line of work by studying changes in U.S. firms’ board
structure following the passage of PNTR.
Second, our study adds to the literature on the advisory
functions performed by outside directors with different
skill sets such as financial expertise, industry experience,
foreign experience, acquisition experience, and legal ex-
pertise.6 We show that the demand for directors with
particular expertise can be driven by firms’ strategy and
business focus and that firms seeking to expand into
foreign markets can benefit from directors with regional
expertise developed from prior work experience. Our
results also complement Masulis et al. (2012), who find
that while independent directors domiciled in foreign
countries (FIDs) provide valuable advisory services when
firms make cross-border M&As, they are less efficient in
monitoring managers. We show that firms can still benefit
from directors’ foreign experience—without losing moni-
toring efficiency—by appointing local directors with such
experience.
Third, we extend the literature on the effect of changes
in the regulatory environment on board structure. While
previous studies examine how firms respond to the pas-
sage of laws that directly regulate board composition,
such as the Sarbanes-Oxley Act in the U.S. (e.g., Linck et
al., 2009) and the female board representation mandate
in Norway (e.g., Ahern and Dittmar, 2012), we focus on
a change in trade policy that affects firm demand for
directors with certain characteristics and show that such a
policy change affects firms’ board structure.
The rest of the paper is organized as follows. Section
2 provides background on the PNTR and develops our
hypotheses. Section 3 describes the data and our empirical
strategies. Section 4 presents results on the effect of the
passage of PNTR on board composition. Section 5 exam-
ines the effect of directors with China experience on the
performance of U.S. firms’ China deals. Section 6 examines
how the stock market and the director labor market
assess directors with China experience and those without
such experience differently and whether our main results
are different between Resident directors and Nonresident
directors. Finally, we summarize and present concluding
remarks in Section 7.
2. Background on PNTR and hypotheses
2.1. Policy background
Before 1980, U.S. imports from China were subject
to non-NTR tariffs under the Smoot-Hawley Tariff Act of
1930. Non-NTR rates are often substantially higher than
6 Avansys,” St. Louis Newsletters, December 23, 2001).
See, for example, Adams and Ferreira (2007), Krishnan et al. (2011),
Masulis et al. (2012), Dass et al. (2014), Huang et al. (2014), Giannetti et
al. (2015), Field and Mkrtchyan (2017), and Kang and Zhang (2018).
the NTR rates that the U.S. levies on WTO members. In
1980, President Carter granted NTR rates to China but only
on an annually renewable basis, which required approval
by U.S. Congress. After the Tiananmen Square incident in
1989, however, the U.S. House of Representatives voted in
1990, 1991, and 1992 to withdraw China’s temporary NTR
status. While China’s NTR status was not overturned, as
the U.S. Senate did not vote in favor of the policy change,
the threat to withdraw China’s NTR status and the uncer-
tainty associated with this threat (Pierce and Schott, 2016;
Handley and Limão, 2017) increased the likelihood that
China would retaliate by raising its own tariffs or taking
other measures to limit U.S. access to the Chinese market.7
U.S. firms therefore put off major investments in China.
In October 20 0 0, Congress granted PNTR status to China
based on the November 1999 U.S.-China agreement that
governed China’s eventual admission to the WTO. PNTR
status became effective upon China’s admission to the
WTO in December 2001. The elimination of the possibility
of sudden tariff spikes on Chinese imports provided U.S.
firms strong incentives to exploit China’s low-cost labor
and growing markets by establishing new facilities in
China, creating strategic relationships with Chinese firms,
and engaging in related-party trade with Chinese firms
(Pierce and Schott, 2016).8
2.2. Hypotheses
The passage of PNTR is expected to have a signif-
icant effect on U.S. firms’ demand for directors with
China experience. The literature suggests that firms facing
significant information challenges benefit from director
expertise acquired through prior work experience. For
example, Dass et al. (2014) find that director experience
in upstream/downstream industries helps firms anticipate
changes in industry conditions and protect themselves
against industry shocks. Field and Mkrtchyan (2017) show
that directors with acquisition experience add value by
helping acquirer firms avoid value-decreasing acquisitions,
select targets with higher synergies, and integrate the
target. Adams et al. (2010) further suggest that firms
could benefit from having directors with region-specific
expertise, particularly when they consider acquiring a
foreign firm or when they seek to expand into a foreign
market.
U.S. firms entering the Chinese market may face sig-
nificant challenges in collecting information about Chinese
firms due to a language barrier, a lack of knowledge about
the political and legal landscape, and a lack of familiarity
with social norms and cultural preferences (Kindleberger,
1969; Hymer, 1976; Grinblatt and Keloharju, 2001; La
Porta et al., 2004).9 U.S. firms entering China thus have
strong incentives to have management teams or boards of
7
See https://www.gao.gov/assets/160/154413.pdf (“U.S. Government
Policy Issues Affecting U.S. Business Activities in China”).
8
For example, in 2001, Emerson announced its largest acquisition, a
$750 million deal to acquire the electric motor business of China’s pri-
vately owned Huawei Technologies (Rick Desloge, “Emerson purchases
9
In line with these arguments, prior studies show that cul-
tural differences between countries affect foreign direct investment
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
directors that have a sound understanding of the business
environment in China. To the extent that directors with
China experience are familiar with the legal and politi-
cal landscape, cultural norms, and customer preferences
in China, these directors are expected to enhance the
board advisory role of U.S. firms pursuing opportunities
in China after the passage of PNTR. In particular, directors
with prior work experience in China or in Chinese divi-
sions/subsidiaries of firms often have first-hand knowledge
of the Chinese market as well as an existing network in
China. Such knowledge and network benefits associated
with prior experience narrow U.S. firms’ information gap
due to differences in cultural, social, and regulatory en-
vironments between the U.S. and China, which improves
their likelihood of making value-increasing investments in
China. U.S. firms should thus have strong incentives to hire
directors with China experience after the passage of PNTR.
This discussion leads to our first hypothesis:
Hypothesis 1: The proportion of directors with China
experience on the board of a U.S. firm increases after the
passage of PNTR in 2000.
If directors with China experience do indeed provide
valuable advisory services, cross-border M&As, JVs, and
SAs by U.S. firms with such directors are expected to be
value enhancing when these investments involve Chinese
targets/partners. Since cross-border investments entail
complex negotiations with local targets/partners, directors
with China experience are expected to help U.S. firms
select Chinese targets/partners, negotiate contract terms,
integrate the two parties, and avoid post-investment cul-
ture clashes or legal problems, resulting in higher market
value and improved operating performance for U.S. firms.
Our second hypothesis is thus as follows:
Hypothesis 2: Compared to U.S. firms with a lower propor-
tion of directors with China experience, those with a higher
proportion of directors with China experience realize higher
announcement returns for M&As, JVs, and SAs involving Chi-
nese firms and better post-investment operating performance.
3. Data, methodology, and summary statistics
3.1. Sample
Our initial sample consists of publicly traded U.S.
manufacturing firms (SIC codes 20 0 0–3999) covered in
Compustat and the Center for Research in Security Prices
(CRSP) from 1996 to 2011. We then merge this sample
with firms covered in BoardEx.10 Our final sample con-
sists of 14,199 firm-year and 95,923 outside director-year
(17,952 outside director) observations. We consider an
outside director having China-related experience if she
has worked in China or has served as a director, chief
executive officer (CEO), chief financial officer (CFO), chief
operating officer (COO), chief information officer (CIO),
chairman, president, vice president, manager, chief officer,
(Guiso et al., 2009), cross-border M&A activity (Ahern et al., 2015), and
SA activity (Shi and Tang, 2015).
10
BoardEx covers only a small number of U.S. firms before 2003. We
obtain additional information on directors over the period 1996 to 2003
from RiskMetrics, Capital IQ, and firms’ 10-K and DEF14A filings.
487
owner, regional CEO, regional CFO, regional COO, regional
president, regional vice president, or regional manager
in the Chinese division of a domestic firm or a foreign
firm. We consider a director’s past experience in both
publicly traded and privately held firms. We obtain firms’
financial information from Compustat and stock returns
from CRSP.
3.2. Measuring effects of PNTR on industries (NTR gap 1999)
and regression specification
Following Pierce and Schott (2016), we capture the
extent to which a four-digit SIC industry is influenced
by the passage of PNTR using NTR gap, the difference
between the non-NTR rate and the NTR tariff rate that was
locked in by PNTR. Pierce and Schott (2016) compute NTR
gaps using the ad valorem equivalent NTR and non-NTR
tariff rates from 1989 to 2001 provided by Feenstra et al.
(2002). The NTR gap for a four-digit SIC industry is the
average gap across the eight-digit Harmonized System
product lines belonging to that industry.11 We then use
the NTR gap based on the non-NTR and NTR rates in 1999
(NTR gap 1999) to measure the extent to which an industry
is influenced by the passage of PNTR. Industries with a
high NTR gap 1999 face greater investment uncertainty in
China and thus U.S. firms in such industries are expected
to be more sensitive to the passage of PNTR.
To examine the impact of the passage of PNTR on
the proportion of directors with China experience on
the boards of U.S. firms, we estimate the following ordi-
nary least squares (OLS) difference-in-differences (DiD)
regression as in Pierce and Schott (2016):
China − directorijt = β0 + β1 NTR gap 1999 j
×Postt + β2 Xijt + δt + θi + εijt , (1)
where firm, industry, and time are denoted by i, j, and t,
respectively, China-directorijt is the proportion of outside
directors with China experience on the board of firm
i in industry j in year t,12 NTR gap 1999 is defined as
above, Post is an indicator equal to one for a firm in the
20 0 0−2011 period (i.e., post-PNTR era) and zero otherwise,
and X is a vector of board and firm characteristics. The
choice of control variables follows previous studies on the
determinants of board structure (e.g., Coles et al., 2008;
Linck et al., 2009; Daniel et al., 2013). δ t and θ i represent
year and firm fixed effects, respectively.
Our key independent variable of interest is the DiD
term, NTR gap 1999 × Post. Hypothesis 1 predicts the
coefficient on this interaction term to be positive and
significant, which suggests that the proportion of direc-
tors with China experience increases more for firms in
high-NTR gap industries than for those in low-NTR gap
industries (first difference) after the passage of PNTR
11
We thank Peter K. Schott for providing industry-level data on the NTR
gap.
12
We require that an outside director’s China experience be prior to the
first year of the directorship in the firm. When the first year of a director-
ship is not available in BoardEx or RiskMetrics, we manually collect this
information from 10-K and DEF14A filings.
488 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
(second difference). The Appendix provides a detailed
description of the variables used in our analysis.
3.3. Summary statistics
Panel A of Table A.1 in the Online Appendix reports
NTR gap 1999 by industry classified according to two-digit
SIC codes. We find that NTR gap 1999 varies substan-
tially across industries, ranging from 0.13 in the food
and kindred products industry to 0.54 in the textile mill
products industry. In Panel B of Table A.1, we report the
change in CIP from 1997 to 2003 for each two-digit SIC
code manufacturing industry. We use CIP in the U.S. as
an alternative measure of the importance of the passage
of PNTR for U.S. firms (Autor et al., 2013; Pierce and
Schott, 2016). We find that seven out of the ten industries
with the largest change in CIP are also among the ten
industries with the highest NTR gap. We further find that
the correlation between NTR gap 1999 and the change in
CIP is 0.42, consistent with the finding in the literature.
Panels A, B, and C of Table 1 present summary statistics
for industry-, firm-, and director-level characteristics, re-
spectively. All firm- and director-level continuous variables
except for China-director are winsorized at the 1% level in
both tails to mitigate the effects of potential outliers. Panel
A shows that NTR gap 1999 has a mean of 0.324, with a
standard deviation of 0.149. Panel B shows that the mean
value of China-director is 0.7%, and that 4.7% of sample
firms have at least one director with China experience on
the board. Panel C shows that the number of directors
with China experience increases over the sample period
(Column b), while their average age decreases after the
passage of PNTR in 20 0 0. It also shows that the average
tenure of directors with China experience is shorter than
that of other directors. The mean number of years of China
experience for these directors is around 12. The last two
columns of Panel C report the ratio of the total number of
directors with China experience to the total number of all
directors by year and the mean value of China-director at
the firm level by year, respectively. These ratios increase
over time from 0.19% and 0.16% in 1996 to 1.55% and 1.34%
in 2011. Notably, we find a significant jump in these ra-
tios in 2001 (the increases are more than double those in
20 0 0), suggesting that demand for directors with China ex-
perience increased substantially with the passage of PNTR
in 20 0 0. Fig. 2 plots the mean proportion of directors with
China experience on the board at the firm level over time.
4. The effect of the passage of PNTR on board
composition
4.1. DiD tests
Table 2 presents estimates of Eq. (1) in which the de-
pendent variable is China-director and the key independent
variable of interest is the interaction between NTR gap
1999 and Post. Column 1 includes only the interaction
between NTR gap 1999 and Post, year fixed effects, and
firm fixed effects. The coefficient on the interaction term
is positive and significant at the 5% level, suggesting that
the passage of PNTR is associated with an increase in
the proportion of directors with China experience on
the board. In Column 2, we add the controls for board
and firm characteristics. We find that the coefficient on
the interaction between NTR gap 1999 and Post remains
positive and significant at the 5% level. The coefficient of
0.012 indicates that moving from an industry at the 25th
NTR gap 1999 percentile (0.23) to an industry at the 75th
NTR gap 1999 percentile (0.40) of the observed distribution
leads to an additional increase in China-director of 0.21%
(= 0.012 × (0.40 − 0.23)) after the passage of PNTR.
Given that the mean China-director for the full sample
is 0.22% in 1999, this result suggests that the impact of
the passage of PNTR on the demand for directors with
China experience is economically large and significant. In
Column 3, we include Revealed NTR (the ratio of duties
paid to custom value for each industry in a given year) as
a control for time-varying industry characteristics, which
captures changes in tariff rates due to the North American
Free Trade Agreement (NAFTA) and other preferential
trade agreements after 2001. When the information on
Revealed NTR is missing due to changes in industry clas-
sification, we replace it with the value available in the
most recent year. We find that the coefficient on Revealed
NTR is negative and significant at the 1% level, suggesting
that firms in industries with a lower Revealed NTR (and
thus that are more exposed to Chinese imports) have
a higher proportion of directors with China experience
on the board. More importantly, the coefficient on the
interaction between NTR gap 1999 and Post is still positive
and significant even after controlling for Revealed NTR.
The results above may be biased if the NTR tariffs were
set to a higher level to protect the affected industries prior
to the passage of PNTR. To ensure that our results are not
driven by the endogeneity of the NTR gaps, in Columns 4
through 6 of Table 2 we repeat the analysis in Columns 1
through 3 using the NTR gap in 1990, ten years prior to
the passage of PNTR. We find that all of the coefficients
on the DiD term remain positive and significant.
To further alleviate endogeneity concerns, in Column
7 we replace the interaction between NTR gap 1999 and
Post with CIP in the U.S. Hypothesis 1 suggests that China-
director should be higher for firms in high-CIP industries
than for those in low-CIP industries. Consistent with this
prediction, we find that the coefficient on CIP is positive
and significant at the 1% level.
To ensure that our DiD results are not confounded by
other macro events that occurred in the latter part of our
sample period (e.g., the financial crisis in 2008), in Column
8 we repeat the analysis in Column 2 focusing on the three
years before (1997 to 1999) and three years after (2001 to
2003) Congress granted PNTR status to China in 20 0 0. We
find that the coefficient on the interaction between NTR
gap 1999 and Post remains positive and significant.
Overall, the results in Table 2 support the prediction
in Hypothesis 1 that U.S. firms respond to the passage of
PNTR by recruiting more directors with China experience.13
13
In untabulated tests, we examine whether a firm’s demand for direc-
tors with China experience increases if its suppliers and customers oper-
ate in high-NTR gap industries and find no significant increase. We also
find no significant increase in the demand for inside directors with China
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503 489

Table 1
Summary statistics.
Panels A, B, and C of this table present summary statistics for industry-, firm-, and director-level characteristics, respectively. The samples consist of
14,199 U.S. manufacturing firm-year observations (Panel B) and 95,923 outside director-year (17,952 outside director) observations (Panel C) covered in
BoardEx, Capital IQ, Compustat, CRSP, EDGAR, and RiskMetrics from 1996 to 2011. Normal trade relations (NTR) gap 1999 is the difference between the non-
NTR tariff rate and the NTR tariff rate in 1999 in a four-digit SIC industry. Smoot-Hawley non-NTR 1990 is Smoot-Hawley-based non-normal trade relations
tariff rates in 1990. China import penetration (CIP) in the U.S. is the ratio of imports from China by U.S. firms in a given year to domestic absorption
in the U.S. (industry shipments plus imports minus exports) in 1991. CIP in eight high-income non-U.S. countries is the ratio of imports from China by
firms in Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain, and Switzerland in a given year to domestic absorption in these countries in
1988. China-director is the ratio of the number of outside directors with China experience to the total number of directors on the board. Years of China
experience is the difference between the starting year of the China experience and the ending year of the China experience. All dollar values are deflated
by the consumer price index in 2007. All firm- and director-level continuous variables except China-director are winsorized at the 1% level in both tails.
The Appendix provides a detailed description of the construction of the other variables.

Panel A: Industry characteristics

Variable p25 Median Mean p75 S.D.

NTR gap 1999 0.228 0.342 0.324 0.400 0.149

Smoot-Hawley non-NTR 1990 0.139 0.341 0.297 0.366 0.124
CIP in the U.S. 0.003 0.021 0.084 0.056 0.171
CIP in eight high-income non-U.S. countries 0.003 0.018 0.064 0.058 0.112

Panel B: Firm characteristics

Variable p25 Median Mean p75 S.D.

China-director 0 0 0.007 0 0.036

Firms having an outside director with China experience (indicator) 0 0 0.047 0 0.213
Firm size ($millions) 58 270 2,529 1,226 8,364
Tobin’s q 1.215 1.743 2.673 2.880 3.096
Return volatility 0.025 0.035 0.125 0.051 0.773
Diversification (indicator) 0 0 0.397 1 0.489
Leverage 0.001 0.115 0.196 0.276 0.331
ROA −0.108 0.049 −0.053 0.115 0.282
Foreign sales ratio 0 0.199 0.274 0.479 0.290
Board size 6 8 8 9 2.299
Board age 57 60 60 63 4.866
Board independence 0.600 0.750 0.705 0.833 0.170
Board tenure 5.250 7.667 8.390 10.750 4.475

Panel C: Director characteristics

Full sample of directors Subsample of outside directors with China experience

No. of Mean Mean No. of Mean Mean Mean years of Mean China-director
Year obs. (a) tenure age obs. (b) tenure age China experience b/a (firm-level)

1996 2,068 9.68 59.54 4 8.00 61.75 – 0.19% 0.16%

1997 2,311 9.42 59.35 6 6.67 62.17 – 0.26% 0.24%
1998 2,604 9.00 59.31 7 6.14 62.14 – 0.27% 0.20%
1999 2,703 9.07 59.42 7 6.86 63.43 – 0.26% 0.22%
2000 2,835 8.91 59.15 10 5.70 61.50 – 0.35% 0.34%
2001 4,344 8.76 58.60 32 4.94 58.13 11.95 0.74% 0.68%
2002 4,398 8.74 58.83 29 6.17 59.86 11.80 0.66% 0.59%
2003 7,547 8.57 58.59 48 5.35 58.27 12.24 0.64% 0.58%
2004 8,579 8.33 58.67 49 5.67 59.27 11.48 0.57% 0.51%
2005 8,881 8.30 58.99 51 5.10 58.57 12.38 0.57% 0.49%
2006 8,872 8.23 59.24 56 4.79 58.45 12.60 0.63% 0.53%
2007 8,783 8.14 59.44 63 4.10 56.56 12.77 0.72% 0.64%
2008 8,513 8.46 60.01 80 4.08 57.16 13.57 0.94% 0.85%
2009 8,060 8.67 60.51 88 4.26 57.82 12.96 1.09% 0.98%
2010 7,671 8.86 60.80 95 4.07 58.84 12.34 1.24% 1.09%
2011 7,754 8.69 61.02 120 3.58 58.40 11.71 1.55% 1.34%

4.2. Instrumental variables analysis
The DiD regression approach is appropriate only if the
treatment is random, that is, not a function of observ-
able or unobservable characteristics that also affect the
outcome variable (China-director). However, unobservable
experience for firms operating in higher NTR gap industries. We discuss
the details of these tests in Section A of the Online Appendix.
omitted variables could affect both China-director and NTR
gap 1999.14 To address this potential omitted variables
problem, we use the instrumental variables approach.
14
For example, in an industry in which U.S. firms have less ability to
compete with Chinese firms, they may have fewer investment opportuni-
ties in China and hence weaker incentives to hire directors with China ex-
perience. To protect such an industry, the U.S. government may increase
NTR rates, resulting in a lower NTR gap. In this case a positive relation
490 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

Fig. 2. Proportion of outside directors with China experience on the board. This figure depicts the mean proportion of outside directors with China ex-
perience for U.S. manufacturing firms covered in BoardEx, Capital IQ, Compustat, CRSP, EDGAR, and RiskMetrics from 1996 to 2011. An outside director
is considered having China-related experience if she has worked in China or has served as a director, chief executive officer (CEO), chief financial offi-
cer (CFO), chief operating officer (COO), chief information officer (CIO), chairman, president, vice president, manager, chief officer, owner, regional CEO,
regional CFO, regional COO, regional president, regional vice president, or regional manager in the Chinese division of a domestic firm or a foreign
firm.

Specifically, we instrument NTR gap 1999 by the Smoot-
Hawley-based non-NTR tariff rate in 1990 (Smoot-Hawley
non-NTR 1990), which had not changed much compared to
the rate initially set in 1930. Pierce and Schott (2016) find
that variation in the Smoot-Hawley-based non-NTR rate
can explain 79% of the variation in the NTR gap across
industries, and thus it satisfies the relevance requirement
of an instrumental variable. Because it is unlikely that the
non-NTR tariff rate set 70 years prior to the passage of
PNTR affects demand for directors with China experience
after 20 0 0 through channels other than the NTR gap, it
also satisfies the exclusion condition of an instrumental
variable.
Table 3 reports estimates of two-stage least squares
(2SLS) regressions. In the first stage, we regress the inter-
action between NTR gap 1999 and Post on the interaction
between Smoot-Hawley non-NTR 1990 and Post and all
of the control variables used in Column 2 of Table 2.
As expected, the coefficient on the interaction between
Smoot-Hawley non-NTR 1990 and Post is positive and signif-
icant at the 1% level (Column 1). The p-value for the Cragg
and Donald (1993) F-statistic is less than 0.001, rejecting
the null hypothesis that the instrument is weak. In the
second stage, we regress China-director on the predicted
between China-director and NTR gap 1999 would be driven by industry
competition rather than by the passage of PNTR.
interaction between NTR gap 1999 and Post estimated from
the first-stage regression (Column 2). We find that the
coefficient on the instrumented interaction term is positive
and significant at the 1% level, suggesting that our findings
in Table 2 are robust to controlling for omitted variables
bias. In Columns 3 and 4, we add Revealed NTR to Columns
1 and 2 and find that our results do not change.
We also apply the instrumental variables approach to
the test that examines how CIP, an alternative measure
of the importance of China for U.S. firms, affects China-
director. To the extent that large imports from China reflect
shocks in U.S. domestic productivity or market demand,
they may not necessarily be driven by the passage of
PNTR, which would affect U.S. firms’ demand for outside
directors with certain characteristics. Following Autor
et al. (2013), we instrument CIP in the U.S. by CIP in
eight high-income non-U.S. countries.15 Fig. 1 shows that
Chinese imports in the other eight high-income countries
are highly correlated with Chinese imports in the U.S.,
possibly due to these high-income economies all being
exposed to an increase in Chinese imports, suggesting that
15
We calculate CIP in eight high-income non-U.S. countries as the ratio
of imports from China by firms in Australia, Denmark, Finland, Germany,
Japan, New Zealand, Spain, and Switzerland in a given year to domestic
absorption in these countries in 1988. Scaling Chinese imports by domes-
tic absorption in 1988 ensures that the variable is exogenous to CIP in the
U.S.
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503 491

Table 2
Effects of the passage of Permanent Normal Trade Relations (PNTR) on board composition: difference-in-differences tests.
This table presents estimates of ordinary least squares (OLS) difference-in-differences regressions in which the dependent variable is the ratio of the
number of outside directors who have China-related experience to the total number of directors on the board. The sample consists of 14,199 U.S. manufac-
turing firm-year observations covered in BoardEx, Capital IQ, Compustat, CRSP, EDGAR, and RiskMetrics from 1996 to 2011. Columns 1 through 7 use the full
sample period and Column 8 uses the subsample period from 1997 to 2003 excluding 2000 (i.e., three years before and after 20 0 0 in which U.S. Congress
granted PNTR status to China). In Columns 3 and 6, we control for Revealed NTR, which is the ratio of duties paid to custom value for each four-digit SIC
industry in a given year. In Column 7, we use China import penetration (CIP) in the U.S., defined as the ratio of imports from China by U.S. firms in a given
year to domestic absorption (industry shipments plus imports minus exports) in the U.S. in 1991, as the measure of the importance of the passage of PNTR
for U.S. firms. NTR gap 1999 is the difference between the non-NTR tariff rate in 1999 and the NTR tariff rate in 1999 in a four-digit SIC industry. Post is
an indicator that equals one for a firm in the 20 0 0−2011 period and zero otherwise. All firm-level continuous variables except the proportion of outside
directors with China experience on the board are winsorized at the 1% level in both tails. The Appendix provides a detailed description of the construction
of the other variables. See Table 1 for sample summary statistics. T-statistics are reported in parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at
the 1%, 5%, and 10% levels, respectively.

Subsample period
Full sample period (year −3 to year +3)

Independent variable (1) (2) (3) (4) (5) (6) (7) (8)
∗∗ ∗∗ ∗∗
NTR gap 1999 × 0.013 0.012 0.012 0.012∗
Post (2.242) (2.080) (2.075) (1.729)
NTR gap 1990 × 0.018∗∗∗ 0.017∗∗∗ 0.016∗∗
Post (2.985) (2.696) (2.511)
CIP in the U.S. 0.013∗∗∗
(4.819)
Log (board size) 0.005∗∗∗ 0.005∗∗∗ 0.005∗∗∗ 0.005∗∗∗ 0.005∗∗∗ 0.007∗
(3.357) (3.419) (3.319) (3.381) (3.327) (1.911)
Board independence 0.001 0.001 0.001 0.001 0.001 0.003
(0.507) (0.526) (0.530) (0.545) (0.670) (0.841)
Log (firm size) −0.001 −0.001 −0.001 −0.001 −0.001 −0.001
(−1.524) (−1.520) (−1.379) (−1.389) (−1.467) (−0.704)
Tobin’s q −0.000 −0.000 −0.000 −0.000 −0.000 0.000
(−0.390) (−0.438) (−0.417) (−0.465) (−0.366) (0.536)
Return volatility 0.000 0.000 0.000 0.000 −0.000 0.002
(0.008) (0.065) (0.003) (0.057) (−1.020) (1.408)
Diversification −0.001 −0.001 −0.001 −0.001 −0.001 0.001
(indicator) (−0.640) (−0.692) (−0.708) (−0.747) (−0.803) (0.817)
Leverage 0.001 0.001 0.001 0.001 0.001 −0.003
(0.512) (0.604) (0.572) (0.658) (0.727) (−0.598)
ROA 0.002∗∗ 0.002∗∗ 0.002∗∗ 0.002∗∗ 0.002∗∗ −0.008
(2.161) (2.226) (2.110) (2.175) (2.184) (−1.334)
Foreign sales ratio 0.004∗∗ 0.004∗∗ 0.003∗ 0.003∗∗ 0.004∗∗ −0.009∗∗
(2.066) (2.092) (1.938) (1.975) (2.232) (−2.299)
Revealed NTR −0.095∗∗∗ −0.089∗∗∗
(−2.909) (−2.742)
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
No. of observations 14,199 13,771 13,771 14,199 13,771 13,771 13,454 2,582
Adj. R2 0.617 0.617 0.617 0.617 0.617 0.617 0.621 0.692

our instrument satisfies the relevance requirement of an
instrumental variable. Because it is unlikely that CIP in the
eight non-U.S. countries directly affects U.S. firms’ demand
for directors with China experience other than through its
correlation with the endogenous variable (i.e., CIP in the
U.S.), it also satisfies the exclusion condition of an instru-
mental variable. Supporting Hypothesis 1, we find that our
instrumental variable is significantly positively related to
the endogenous variable in Column 5 and the coefficient
on the predicted CIP is positive and significant in Column
6. Clustering standard errors at the firm, industry (four-
digit), firm and year, or industry and year level leads to
the similar results as those in Table 3 (not reported).16
5. The effect of directors with China experience on firm
value and performance
In this section we examine whether U.S. firms with a
higher China-director realize higher announcement returns
and better long-term operating performance for their
China deals than those with a lower China-director (Hy-
pothesis 2). Our initial samples of cross-border M&As, JVs,
and SAs conducted by U.S. firms from 1996 to 2011 come
from the Securities Data Company (SDC) Platinum M&A
database. The final sample consists of 234 China deals (98
M&As, 56 JVs, and 80 SAs).17

16
Our conclusion remains unchanged when we use a Mahalanobis dis-
tance matching (MDM) approach to address potential endogeneity bi-
ases stemming from observable omitted firm characteristics. We use the
MDM approach instead of the propensity score matching approach be-
cause Zhao (2004) shows that when sample size is small, the standard
errors and mean square errors of MDM estimators are lower. We discuss
the results using the MDM approach in Section B of the Online Appendix.
17
For an observation to be included in our sample, (1) the target (part-
ner) must be a Chinese firm, (2) the deal must be completed, and (3)
stock return, accounting, and board composition information for U.S. ac-
quirers must be available. For M&As, we further require that the acquirer
492 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

Table 3
Effects of the passage of Permanent Normal Trade Relations (PNTR) on board composition: instrumental variables approach.
This table presents estimates of two-stage least squares regressions. In Columns 1 through 4, the Smoot-Hawley-based non-NTR tariff rate in 1990 (Smoot-
Hawley non-NTR 1990) is used as an instrument for NTR gap 1999, and in Columns 5 and 6, China import penetration (CIP) in eight high-income non-U.S.
countries is used as an instrument for CIP in the U.S. The sample consists of 13,771 U.S. manufacturing firm-year observations covered in BoardEx, Capital
IQ, Compustat, CRSP, EDGAR, and RiskMetrics from 1996 to 2011. In the first-stage regressions, the dependent variables are the interaction between NTR
gap 1999 and Post (Columns 1 and 3) and CIP in the U.S. (Column 5). In the second-stage regressions, the dependent variable is the proportion of outside
directors with China experience on the board (China-director) (Columns 2, 4, and 6). NTR gap 1999 is the difference between the non-NTR tariff rate in
1999 and the NTR tariff rate in 1999 in a four-digit SIC industry. Revealed NTR is the ratio of duties paid to custom value for each four-digit SIC industry in
a given year. Post is an indicator that equals one for a firm in the 20 0 0−2011 period and zero otherwise. CIP in the U.S. is the ratio of imports from China
by U.S. firms in a given year to domestic absorption in the U.S. (industry shipments plus imports minus exports) in 1991. CIP in eight high-income non-U.S.
countries is the ratio of imports from China by firms in Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain, and Switzerland in a given year
to domestic absorption in these countries in 1988. All firm-level continuous variables except China-director are winsorized at the 1% level in both tails. The
Appendix provides a detailed description of the construction of the other variables. See Table 1 for sample summary statistics. T-statistics are reported in
parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

Using Smoot-Hawley non-NTR 1990 as an instrumental variable Using CIP in eight high-income
non-U.S. countries as an
Without controlling for revealed NTR Controlling for revealed NTR
instrumental variable
NTR gap 1999 × Post China-director NTR gap 1999 × Post China-director CIP in the U.S. China-director

First stage Second stage First stage Second stage First stage Second stage

Independent variable (1) (2) (3) (4) (5) (6)

NTR gap 1999 × Post 0.021∗∗∗ 0.019∗∗∗

(2.843) (2.577)
Smoot-Hawley non-NTR 0.749∗∗∗ 0.756∗∗∗
1990 × Post (133.781) (135.254)
CIP in the U.S. 0.027∗∗∗
(7.602)
CIP in eight high-income 1.027∗∗∗
non-U.S. countries (118.957)
Log (board size) −0.001 0.005∗∗∗ −0.002 0.005∗∗∗ −0.014∗∗∗ 0.005∗∗∗
(−0.817) (3.348) (−1.112) (3.413) (−3.800) (3.364)
Board independence 0.001 0.001 0.001 0.001 −0.006 0.002
(0.321) (0.508) (0.247) (0.526) (−1.202) (0.692)
Log (firm size) 0.002∗∗∗ −0.001 0.002∗∗∗ −0.001 0.005∗∗∗ −0.001
(4.029) (−1.475) (4.121) (−1.482) (4.008) (−1.380)
Tobin’s q −0.000∗∗∗ −0.000 −0.000∗∗∗ −0.000 0.001∗∗ −0.000
(−3.929) (−0.336) (−3.728) (−0.396) (2.364) (−0.264)
Return volatility −0.000 0.000 −0.000 0.000 −0.001 −0.000
(−0.160) (0.005) (−0.413) (0.063) (−1.216) (−0.923)
Diversification −0.001 −0.001 −0.000 −0.001 −0.003 −0.001
(indicator) (−0.611) (−0.703) (−0.455) (−0.741) (−1.371) (−0.840)
Leverage 0.005∗∗∗ 0.001 0.005∗∗∗ 0.001 −0.001 0.001
(4.471) (0.480) (4.106) (0.579) (−0.523) (0.749)
ROA −0.002∗∗ 0.002∗∗ −0.002∗∗∗ 0.002∗∗ 0.000 0.002∗∗
(−2.262) (2.160) (−2.583) (2.226) (0.273) (2.133)
Foreign sales ratio −0.005∗∗∗ 0.004∗∗ −0.005∗∗∗ 0.004∗∗ −0.034∗∗∗ 0.004∗∗
(−2.603) (2.012) (−2.808) (2.051) (−8.252) (2.233)
Revealed NTR 0.407∗∗∗ −0.095∗∗∗
(12.630) (−2.910)
Cragg and Donald (1993) p-value p-value p-value
F-statistic < 0.001 0.001 0.001
Year fixed effects Yes Yes Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes Yes Yes
No. of observations 13,771 13,771 13,771 13,771 13,454 13,454
Adj. R2 0.977 – 0.977 – 0.920 –

To calculate abnormal returns, we use the market
model with parameters estimated using 210 trading days
of return data ending 11 days before the M&A, JV, or SA
announcement. The CRSP value-weighted return is used to
proxy for the market portfolio return. In untabulated tests,
we find that the mean (median) CARs (−1, 1) for U.S. firms
obtain at least 51% of the target’s shares and the deal value be larger than
$1 million. For JVs and SAs, we further require that the operation be in
China.
with and without a director with China experience are
3.09% (1.32%) and 0.14% (−0.004%), respectively. The differ-
ence in mean CARs between the two groups is significant
at the 5% level.
To better understand the cross-sectional variation in
CARs (−1, 1) for China deals, we perform OLS regressions.
The results are presented in Panel A of Table 4. The
dependent variable is the CAR (−1, 1) and the key inde-
pendent variable of interest is China-director. The choice
of control variables follows Masulis et al. (2007) and
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503 493

Table 4
Effects of outside directors with China experience on announcement returns for U.S. firms pursuing China deals.
Panel A of this table presents estimates of ordinary least squares (OLS) regressions in which the dependent variable is the cumulative abnormal return
for U.S. firms that pursue cross-border mergers and acquisitions (M&As), joint ventures (JVs), or strategic alliances (SAs) involving Chinese firms (China
deals) from one day before to one day after the announcement date (CAR (−1, 1)). Panel B presents estimates of two-stage least squares (2SLS) regressions
in which the natural logarithm of the number of immigrants from China in a given year in the state in which the firm is headquartered (Log (immigrants))
is used as an instrument for the proportion of outside directors with China-related experience on the board (China-director). The dependent variable in
the first-stage regressions is China-director (Columns 1 and 3) and that in the second-stage regressions is CAR (−1, 1) (Columns 2 and 4). In both panels,
the sample consists of 234 China deals (98 M&As, 56 JVs, and 80 SAs) conducted by U.S. firms over the 1996 to 2011 period. Executive China-director is the
proportion of inside directors with China experience on the board. China-director with recent (early) work experience is the proportion of outside directors
with China experience that is obtained between year −7 and year −1 (prior to year −7), where year 0 is the director appointment year. First China deal is
an indicator that equals one if the U.S. firm engages in a particular type of China deal for the first time during the sample period and zero otherwise. Past
China investment experience is an indicator that equals one if the U.S. firm engaged in other China deals prior to the current China deal and zero otherwise.
Using 210 trading days of return data ending 11 days before the M&A, JV, or SA announcement, we estimate daily abnormal return using the market model.
The CRSP value-weighted return is used to proxy for the market portfolio return. All firm-level continuous variables except China-director are winsorized
at the 1% level in both tails. The Appendix provides a detailed description of the construction of the other variables. T-statistics based on robust standard
errors clustered at the firm level are reported in parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

Panel A: OLS regressions

China deals

M&As + M&As + M&As + M&As + M&As +

JVs + SAs M&As JVs SAs JVs + SAs JVs + SAs JVs + SAs JVs + SAs

Independent variable (1) (2) (3) (4) (5) (6) (7) (8)
∗∗ ∗ ∗ ∗ ∗∗ ∗∗ ∗
China-director 0.191 0.854 0.240 0.246 0.221 0.192 0.302
(2.189) (1.665) (1.745) (1.850) (2.459) (2.152) (1.701)
First China deal 0.000
(indicator) (0.026)
Past China investment 0.002
experience (indicator) (0.217)
Executive China-director −0.188
(−1.056)
China-director with recent 0.487∗
work experience (1.728)
China-director with early 0.103
work experience (1.058)
Log (board size) 0.021 −0.022 −0.057∗∗ 0.094∗ 0.013 0.023 0.041 0.052∗
(1.323) (−0.343) (−2.215) (1.903) (0.810) (1.472) (1.611) (1.802)
Board independence −0.014 0.003 −0.042 −0.052 −0.029 −0.013 −0.033 −0.041
(−0.483) (0.021) (−1.142) (−0.485) (−0.816) (−0.437) (−0.696) (−0.858)
Log (firm size) −0.008∗∗∗ −0.002 0.007 −0.010 −0.009∗∗ −0.008∗∗∗ −0.010∗∗ −0.010∗∗
(−2.816) (−0.270) (1.238) (−1.420) (−2.498) (−2.972) (−2.174) (−2.375)
Tobin’s q 0.002 0.004 0.000 −0.013 0.001 0.002 −0.002 −0.002
(0.532) (0.363) (0.015) (−1.649) (0.436) (0.507) (−0.450) (−0.536)
R&D −0.069 −0.441 −0.058 −0.143 −0.116 −0.067 −0.103 −0.090
(−0.655) (−1.478) (−0.333) (−0.641) (−1.032) (−0.640) (−0.670) (−0.644)
Leverage −0.002 0.158 0.002 −0.049 −0.016 −0.004 −0.011 −0.024
(−0.090) (1.652) (0.051) (−0.831) (−0.564) (−0.151) (−0.279) (−0.691)
Free cash flow −0.041 −0.040 0.049 −0.093 −0.047 −0.043 −0.073∗ −0.061
(−0.674) (−0.250) (0.389) (−1.469) (−0.804) (−0.697) (−1.878) (−1.541)
Foreign sales ratio −0.005 0.094 0.063∗∗∗ −0.175 −0.000 −0.005 −0.037 −0.038
(−0.201) (1.516) (2.866) (−1.269) (−0.002) (−0.165) (−0.676) (−0.692)
High tech (indicator) −0.007 −0.028 −0.003 0.018 0.000 −0.008 0.006 −0.001
(−0.541) (−1.132) (−0.189) (0.219) (0.003) (−0.586) (0.244) (−0.023)
Currency strength 0.003 0.010 0.006 −0.012 −0.001 0.003 0.006 0.004
(indicator) (0.426) (0.579) (0.527) (−0.588) (−0.140) (0.455) (0.630) (0.492)
Price run-up −0.037
(−1.433)
Industry M&A 0.639
(0.196)
Private target (indicator) 0.077
(1.385)
All cash deal (indicator) 0.038∗
(1.718)
Stock deal (indicator) 0.107∗
(1.759)
Diversifying M&A −0.004
(indicator) (−0.232)
Licensing agreement −0.016 0.065∗
(indicator) (−0.742) (1.739)
Manufacturing −0.002 0.071
agreement (indicator) (−0.207) (1.501)
(continued on next page)
494 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

Table 4
(continued)

Panel A: OLS regressions

China deals

M&As + M&As + M&As + M&As + M&As +

JVs + SAs M&As JVs SAs JVs + SAs JVs + SAs JVs + SAs JVs + SAs

Independent variable (1) (2) (3) (4) (5) (6) (7) (8)

M&A (indicator) −0.003 −0.005 −0.002 0.000 −0.005

(−0.338) (−0.656) (−0.285) (0.039) (−0.503)
Joint venture (indicator) −0.015 −0.020∗∗ −0.015 −0.018 −0.021∗
(−1.557) (−2.086) (−1.561) (−1.549) (−1.912)
Board tenure −0.001
(−0.961)
Board age 0.000
(0.056)
Busy board 0.009
(0.349)
Executive experience −0.011
(−0.311)
Finance experience 0.128∗∗
(2.057)
Foreign experience −0.140∗∗
(−2.540)
Manufacturing experience 0.015
(0.591)
Outside director shares −5.719
(−1.059)
CEO-chair duality 0.004
(indicator) (0.419)
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes No Yes Yes Yes Yes Yes
No. of observations 234 98 56 80 234 234 234 234
Adj. R2 0.034 0.209 0.014 0.064 0.058 0.025 0.035 0.080

Panel B: 2SLS regressions

China-director CAR (−1, 1) China-director CAR (−1, 1)

First stage Second stage First stage Second stage

Independent variable (1) (2) (3) (4)

∗
China-director 0.821 0.603∗
(1.646) (1.733)
Log (immigrants) 0.007∗∗ 0.008∗∗∗
(2.380) (2.640)
Control variables Column 1 of Panel A Column 1 of Panel A Column 5 of Panel A Column 5 of Panel A
Cragg and Donald (1993) F-statistic p-value = 0.018 – p-value = 0.009 –
Year fixed effects Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes
No. of observations 234 234 234 234
Adj. R2 0.064 – 0.062 –

Erel et al. (2012). We also control for year fixed effects and
industry fixed effects at the two-digit SIC level. In Column
1, we use the pooled sample of M&As, JVs, and SAs when
estimating the regression. Supporting Hypothesis 2, we
find that the coefficient on China-director is positive and
significant at the 5% level. In Columns 2–4, we estimate
the regressions separately using the subsamples of M&As,
JVs, and SAs. The coefficients on China-director are all
positive and significant at the 10% level.
In Column 5, we add several board and governance
attributes including the average tenure and age of outside
directors, director busyness, directors’ past experience
and stock holdings, and CEO-chair duality to the regres-
sion in Column 1 to mitigate potential biases stemming
from omitted variables.18 In Column 6, we control for
an indicator that equals one if the firm pursues any
China deal for the first time during the sample period
and zero otherwise (First China deal) and an indicator
that equals one if the firm engaged in other China deals
prior to the current China deal and zero otherwise (Past
China investment experience), and in Column 7, we control
for the proportion of inside directors with China expe-
18
For example, directors with China experience may have more qual-
ified experience or be more talented than other directors, which con-
tributes to higher announcement returns. It is also possible that better
governance, which affects firm value more positively, helps firms attract
more directors with China experience.
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
rience on the board (Executive China-director). We find
that our main finding is robust to controlling for these
variables.
In Column 8, we divide China-director into the propor-
tion of directors with China experience that is obtained
between year −7 and year −1 (China-director with recent
work experience), where year 0 is the director appointment
year, and the proportion of directors with China experi-
ence that is obtained prior to year −7 (China-director with
early work experience). We find that the value-enhancing
effect of directors with China experience is more pro-
nounced when such experience is obtained in recent years
than when it is obtained in early years. Thus, directors’
knowledge and understanding of the recent environment
in China are particularly important and relevant for im-
proving the value of firms that pursue investments in
China.19
To address the potential endogeneity bias that unob-
servable firm and director characteristics affect both firm
value and board structure, we estimate 2SLS regressions
in which we use the natural logarithm of the number
of immigrants from China (Log (immigrants)) in a given
year in the firm’s headquarters state as an instrumental
variable for China-director.20 Prior studies show that a
larger pool of potential talent in the local area influences
a firm’s board appointment decision (Knyazeva et al.,
2013), suggesting that firms located in states with a larger
number of Chinese immigrants are more likely to hire
directors with China experience. Furthermore, the number
of Chinese immigrants in a state is unlikely to affect ab-
normal returns around announcements of China deals. Our
instrument is therefore likely to meet both the relevance
and exclusion requirements.
Panel B of Table 4 reports estimates of 2SLS regressions
for the pooled sample of China deals. In the first-stage
regression, the coefficient on Log (immigrants) is positive
and significant at the 5% level, confirming the relevance of
our instrumental variable (Column 1). In the second-stage
regression, the coefficient on instrumented China-director
is positive and significant at the 10% level (Column 2). The
results do not change when we include governance and
director attributes as additional controls in Columns 3 and
4.21
19
Controlling for social ties between U.S. firms’ outside directors and
Chinese firms’ directors/CEOs in the regressions does not change the pos-
itive effect of China-director on CARs. We discuss these results in Section
C of the Online Appendix.
20
We obtain immigrant data from Yearbook of Immigration Statistics
published by the U.S. Department of Homeland Security.
21
To further alleviate the concern that our results are driven by un-
observable firm qualities or director talents, in Section D of the Online
Appendix, we conduct placebo tests using U.S. firms’ domestic and cross-
border M&As, JVs, or SAs that do not involve Chinese firms (Non-China
deals). We find that China-director has no significant effect on the CARs
for Non-China deals. As an additional test, in Section E of the Online Ap-
pendix, we investigate the effect of directors with China experience on
the likelihood of subsequent divestitures or asset sales after China deals.
We find that firms with a higher China-director are less likely to divest
or sell their acquired assets/JVs due to poor performance, which provides
further support for Hypothesis 2 that directors with China experience fa-
cilitate U.S. firms’ value-increasing investments in China.
495
To the extent that the positive announcement returns
for U.S. firms engaging in China deals documented in
Table 4 reflect an improvement in their future operating
performance, we expect U.S. firms with a higher China-
director to experience better post-deal long-term operating
performance than those with a lower China-director. To
test this prediction, we regress the change in operating
performance of U.S. firms after a China deal on China-
director, the control variables used in Panel A of Table 4,
and year and industry fixed effects. Following Field and
Mkrtchyan (2017), we calculate the change in operating
performance as the difference in operating performance
between the average industry-median-adjusted return on
assets (ROA) over the three years after completion and
the industry-median-adjusted ROA one year before the
announcement year (Change in ROA). Using return on sales
instead of ROA does not change the conclusion. Table A.6
in the Online Appendix reports results from OLS regres-
sions of Change in ROA and those from 2SLS regressions in
which we use Log (immigrants) as an instrumental variable
for China-director. Supporting Hypothesis 2, we find that
the coefficients on China-director are all positive and sig-
nificant. Thus, U.S. firms with a higher China-director have
better long-term operating performance after China deals
than those with a lower China-director.
6. Additional tests
In this section we examine how the stock market reacts
to appointment announcements of directors with China
experience and whether these directors are subsequently
rewarded for their positive roles and qualifications in the
director labor market with more board seats. We also
examine whether our main results are different between
Resident directors and Nonresident directors.
6.1. Stock market reactions to director appointment
announcements
To examine the market reactions around director
appointment announcements, we obtain appointment
announcement dates from the Audit Analytics Director
and Officer Changes database. Following Fahlenbrach et
al. (2017), we use 8-K filing accepted dates as director
appointment announcement dates. The initial sample con-
sists of 1942 outside director appointments, of which 39
are the appointments of directors with China experience.22
To compare the appointment announcement returns for
these 39 directors with those for directors without China
experience who are highly similar with respect to their
expertise and educational background, we use the MDM
approach. The matching covariates include director age,
22
We exclude appointment events with other major confounding cor-
porate events (e.g., announcements of quarterly earnings, dividend pay-
ments, M&As, management guidance, and 8-K filings of other director or
officer changes) within five trading days before and after the date the 8-K
filing is accepted by the U.S. Securities and Exchange Commission (SEC).
496 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

Table 5
Announcement returns for U.S. firms that appoint outside directors with China experience.
This table presents the mean and median cumulative abnormal returns for U.S. firms that appoint outside directors with China experience and those
that appoint outside directors without China experience from five days before to one day after the 8-K filing accepted date (CARs (−5, 1)) (Panel A)
and estimates of ordinary least squares (OLS) regressions in which the dependent variable is the CAR (−5, 1) (Panel B). The sample consists of 78 U.S.
manufacturing firms (39 treatment firms that appoint outside directors with China experience and 39 control firms that appoint outside directors without
China experience) covered in BoardEx, Compustat, CRSP, EDGAR, and Audit Analytics from 2004 to 2011. We match each treatment firm with a control
firm according to the Mahalanobis distance calculated using several director and firm characteristics. The director characteristics used in the matching
are director age, tenure, whether the director graduated from an Ivy League university, whether the director has a JD, MBA, or PhD degree, and whether
the director has finance, executive, foreign, or manufacturing industry experience. Firm characteristics used in the matching are firm size and ROA. China-
director appointment is an indicator that equals one for a treatment firm and zero for a control firm. All firm-level continuous variables are winsorized
at the 1% level in both tails. The Appendix provides a detailed description of the construction of the other variables. In Panel A, the numbers in the last
column are t-statistics of the t-test for equality of mean CARs and z-statistics of the Wilcoxon rank-sum test for equality of median CARs. In Panel B,
t-statistics based on robust standard errors clustered at the firm level are reported in parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at the 1%,
5%, and 10% levels, respectively.

Panel A: Univariate tests of the differences in CARs (−5, 1) between treatment and control firms

Treatment firms Control firms

appointing directors appointing directors
with China experience without China Test of difference
CARs (−5, 1) All firms (N = 39): a experience (N = 39): b (a – b)

Mean 0.930 2.313∗∗ −0.453 2.766∗∗

Median −0.021 0.991∗∗ −1.194 2.185∗∗

Panel B: OLS regressions of CARs (−5, 1) for firms that appoint directors with and without China experience

CAR (−5, 1)

Independent variable (1) (2) (3)

China-director appointment (indicator) 0.036∗∗∗ 0.034∗∗ 0.034∗∗

(2.726) (2.298) (2.068)
Director tenure 0.003
(0.968)
Director age −0.001
(−0.392)
Director from Ivy League university (indicator) −0.035
(−1.456)
Director with PhD degree (indicator) 0.026
(1.372)
Director with JD degree (indicator) −0.010
(−0.275)
Director with MBA degree (indicator) 0.018
(0.945)
Director with foreign experience (indicator) −0.002
(−0.111)
Director with finance experience (indicator) 0.007
(0.174)
Director with manufacturing experience (indicator) −0.004
(−0.188)
Director with executive experience (indicator) −0.010
(−0.416)
Control variables (Column 2 of Table 2) No Yes Yes
Year fixed effects Yes Yes Yes
Industry fixed effects Yes Yes Yes
No. of observations 78 76 76
Adj. R2 0.041 0.017 −0.065

tenure, whether the director graduated from an Ivy League
university, whether the director has a JD, MBA, or PhD
degree, and whether the director has finance, executive,
foreign, or manufacturing industry experience. We also use
firm size and ROA as additional matching covariates. We
match each treatment firm that appoints a director with
China experience to a control firm that appoints a director
without China experience. The final sample consists of 39
treatment and 39 control firms.
The univariate results are reported in Panel A of Table
5. We find that the mean and median CARs (−5, 1) for
treatment firms are significant at 2.31% and 0.99%, respec-
tively. The corresponding CARs (−5, 1) for control firms are
insignificant at −0.45% and −1.19%. The difference in mean
(median) CARs between the two groups is significant at
the 5% level.
Panel B of Table 5 presents estimates of OLS regressions
in which the dependent variable is the CAR (−5, 1). The
regressions control for matching covariates and the vari-
ables used in Column 2 of Table 2. The key independent
variable of interest is China-director appointment, which
is an indicator that equals one for a treatment firm and
zero for a control firm. We find that the coefficient on
China-director appointment is positive and significant in all
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503 497

Table 6
Additional directorships of outside directors with China experience after the passage of Permanent Normal Trade Relations (PNTR): director-level analysis.
This table presents estimates of ordinary least squares (OLS) regressions of changes in board seats after the passage of PNTR. The sample consists of 187
outside directors with China experience prior to 20 0 0 (treatment directors) and 187 outside directors without China experience throughout the sample
period (control directors). We match each treatment director in 20 0 0 with a director without China experience throughout the sample period according
to the Mahalanobis distance calculated using director and firm characteristics in 1999. The director characteristics used in the matching are director age,
tenure, the number of board seats held in 1999, whether the director graduated from an Ivy League university, whether the director has a JD, MBA, or
PhD degree, and whether the director has finance, executive, foreign, or manufacturing industry experience prior to 20 0 0. Firm characteristics used in the
matching are firm size and ROA. In Panel A, the dependent variable is the change in the number of board seats that the director holds in publicly traded
U.S. manufacturing firms from 1999 to year t (t = 20 0 0 to 2005). Treatment is an indicator that equals one for outside directors with China experience and
zero otherwise. In Panel B, the dependent variable is the change in the number of board seats that the director holds in high-NTR gap manufacturing firms
in excess of the number of board seats that the director holds in low-NTR gap manufacturing firms from year 1999 to year t (t = 20 0 0 to 20 05). Firms are
classified as high- and low-NTR gap manufacturing firms according to the median NTR gap 1999. NTR gap 1999 is the difference between the non-NTR tariff
rate in 1999 and the NTR tariff rate in 1999 in a four-digit SIC industry. All firm-level continuous variables are winsorized at the 1% level in both tails. The
Appendix provides a detailed description of the construction of the other variables. T-statistics based on robust standard errors clustered at the director
level are reported in parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

t = 20 0 0 t = 2001 t = 2002 t = 2003 t = 2004 t = 2005

Independent variable (1) (2) (3) (4) (5) (6)

Panel A: Change in the number of board seats from 1999 to year t

Treatment (indicator) 0.160∗∗ 0.182∗∗ 0.160∗∗ 0.297∗∗∗ 0.298∗∗∗ 0.408∗∗∗

(2.226) (2.262) (2.034) (3.197) (2.981) (3.740)
No. of observations 374 374 374 355 348 321
Adj. R2 0.011 0.012 0.009 0.024 0.021 0.031

Panel B: Change in the number of board seats in high-NTR gap firms in excess of the number of board seats in low-NTR gap firms from 1999 to year t

Treatment (indicator) 0.171∗∗ 0.203∗ 0.171 0.337∗ 0.458∗∗ 0.562∗∗∗

(2.222) (1.736) (1.337) (1.904) (2.548) (3.070)
No. of observations 374 374 374 355 348 321
Adj. R2 0.011 0.006 0.002 0.007 0.015 0.020

three regressions.23 Thus, the market’s exante assessments
of director appointment announcements are more positive
for directors with China experience than for those without
such experience.
6.2. Additional directorships of directors with China
experience after the passage of PNTR
In this section, we examine whether directors with
China experience are rewarded in the director labor mar-
ket with additional board seats after the passage of PNTR.
There are two reasons why they obtain more directorships
in other firms post-PNTR. First, firm demand for directors
with China experience has increased significantly after the
passage of PNTR, which exceeds the supply of such direc-
tors, resulting in excess demand for them. Second, prior
literature shows that director performance and ability are
positively related to the number of outside directorships
that a director holds (Gilson, 1990; Kaplan and Reishus,
1990; Booth and Deli, 1996; Brickley et al., 1999; Yermack,
2004; Harford and Schonlau, 2013), suggsting that the
number of outside directorships is positively related to
market demand for director talent. If directors with China
experience have a reputation for playing a value-increasing
advisory role with respect to China-related matters, they
are likely to receive more board seats in other firms after
the passage of PNTR due to the market’s strong demand
for these directors.
23
Since the sample size is small, in untabulated tests, we reestimate the
regressions by replacing two-digit SIC code dummies with Fama-French
five-industry classification code dummies and find that our results do not
change.
To identify board seats gained by a director after
the passage of PNTR, we match a director with China
experience prior to 20 0 0 with a director without such
experience throughout the sample period according to the
Mahalanobis distance calculated using firm and director
characteristics in 1999. We use as matching covariates
those used in Table 5. In addition, we use the number
of board seats held in 1999 as an additional matching
variable. Our final sample consists of 374 outside directors
with and without China experience prior to 20 0 0. Next,
we regress the change in the number of board seats that a
director holds in publicly traded U.S. manufacturing firms
from 1999 to year t (t = 20 0 0 to 20 05) on a treatment
indicator that is equal to one for an outside director
with China experience and zero otherwise. The results
are reported in Panel A of Table 6. We find that the
coefficients on the treatment indicator are positive and
significant in all columns, suggesting that directors with
China experience start to gain more outside directorships
than other directors immediately after the passage of
PNTR, and continue to receive more outside directorships
for several years after the passage of PNTR.
To determine which firms demand more directors with
China experience, we split firms into high- and low-NTR
gap firms according to the sample median NTR gap 1999
and calculate the change in the number of board seats
the director holds in high-NTR gap manufacturing firms in
excess of the number of board seats the director holds in
low-NTR gap manufacturing firms from year 1999 to year
t (t = 20 0 0 to 20 05). We then regress this change in the
number on a treatment indicator. The results are reported
in Panel B of Table 6. We find that the coefficients on
the treatment indicator are positive and significant in
498 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

Table 7
Residence locations of outside directors with China experience.
This table presents estimates of ordinary least squares (OLS) and conditional logit regressions in which the dependent variables are the cumulative
abnormal return for U.S. firms that pursue cross-border mergers and acquisitions (M&As), joint ventures (JVs), or strategic alliances (SAs) involving Chinese
firms (China deals) from one day before to one day after the announcement date (CAR (−1, 1)) (Column 1), change in post-deal operating performance
for U.S. firms pursuing China deals (Column 2), CEO delta (Column 3), the natural logarithm of one plus CEO total compensation (Column 4), an indicator
that equals one if the U.S. firm experiences a forced CEO turnover in a given year and zero otherwise (Column 5), an indicator that equals one if the U.S.
firm’s quarterly or annual financial report is subsequently restated due to fraud, misrepresentation, and/or an investigation by the SEC in a given year and
zero otherwise (Column 6), and an indicator that equals one if the outside director attends fewer than 75% of board meetings in a given year and zero
otherwise (Column 7). In Columns 1 and 2, the sample consists of 234 U.S. firms that conduct China deals (98 M&As, 56 JVs, and 80 SAs) over the 1996
to 2011 period. In Columns 3–5 and 7, the sample consists of S&P 1500 manufacturing firms from 1996 to 2011. In Column 6, the sample consists of U.S.
manufacturing firms from 1996 to 2011. China-director domiciled in the U.S. (foreign countries) is the proportion of outside directors on the board who have
China experience and reside in the U.S. (foreign countries). All firm-level continuous variables except China-director domiciled in the U.S. (foreign countries)
are winsorized at the 1% level in both tails. The Appendix provides a detailed description of the construction of the other variables. T-statistics based on
robust standard errors clustered at the firm level are reported in parentheses. ∗ ∗ ∗ , ∗ ∗ , and ∗ indicate statistical significance at the 1%, 5%, and 10% levels,
respectively.

Log (1 + CEO Forced CEO Financial Meeting attendance

Change in total turnover restatement less than 75%
CAR (−1, 1) ROA CEO delta compensation) (indicator) (indicator) (indicator)

OLS OLS OLS OLS Conditional logit Conditional logit Conditional logit
Independent variable (1) (2) (3) (4) (5) (6) (7)

China-director domiciled 0.275∗ 0.333∗∗ −0.545 −0.718 −12.342 1.511 −0.845

in the U.S.: a (1.775) (2.208) (−0.719) (−1.292) (−1.094) (0.292) (−0.884)
China-director domiciled in 0.003 0.085 −1.314 −0.798 −9.446 33.254∗ 2.553∗∗∗
foreign countries: b (0.020) (0.271) (−1.400) (−0.949) (−0.791) (1.733) (5.721)
Industry-adjusted return: c 0.103∗∗∗ −0.816∗∗
(4.071) (−2.128)
a×c −0.027 12.469
(−0.075) (0.841)
b×c 0.036 4.912
(0.066) (0.698)
R&D 0.188 −0.094
(0.325) (−0.269)
Log (idiosyncratic volatility) 0.220∗∗ 0.067
(2.547) (1.326)
Capex 1.961∗∗ 0.750
(2.298) (1.258)
CEO tenure 0.039∗∗∗ −0.006∗ 0.036
(6.728) (−1.751) (1.205)
CEO-chair duality (indicator) −0.045 0.017 −0.035
(−0.886) (0.499) (−0.113)
E-index 0.004 0.023 −0.194
(0.133) (1.137) (−1.057)
Outside director shares 1.415∗∗ −0.475∗ 5.240
(2.338) (−1.822) (1.006)
Female board (indicator) 0.043 −0.057 −0.125
(0.669) (−1.330) (−0.297)
Busy board −0.036 0.043 −0.523
(−0.457) (0.861) (−0.942)
CEO with block ownership 0.147
(indicator) (0.155)
Old CEO (indicator) −0.598
(−1.029)

Column 2 of
Column 2 of Column 2 of Table 2 except
Table 2 except Table 2 except Tobin’s q, Return
Return volatility, Return volatility, volatility,
Column 1 of Column 1 of Diversification, Diversification, Diversification, Column 2 of Column 2 of
Control variables Table 4 Panel A Table 4 Panel A and ROA and ROA Leverage, and ROA Table 2 Table 2

Year fixed effects Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes No No No No No
Firm fixed effects No No Yes Yes Yes Yes Yes
No. of observations 234 219 3,899 4,043 756 642 28,881
Adj. R2 0.027 0.149 0.775 0.743 – – –
Log-likelihood – – – – −193.407 −124.835 −2,944.649
Pseudo R2 – – – – 0.086 0.138 0.050
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
all columns except for Column 3. Thus, the increase in
demand for directors with China experience is particularly
pronounced among high-NTR gap firms after the passage
of PNTR. In untabulated tests, we find that the additional
board seats that directors with China experience obtain
after the passage of PNTR are due to an increase in direc-
torships in high-NTR gap firms rather than to a decrease
in directorships in low-NTR gap firms.
6.3. Are resident directors different from nonresident
directors?
While our results thus far are consistent with the view
that directors with China experience perform a value-
increasing advisory role for firms pursuing China deals, it
is also possible that the results are due to the monitoring
service provided by these directors. To address this issue,
we examine whether China-director is related to three
governance measures that are extensively studied in prior
literature: CEO pay-performance sensitivity (e.g., Jensen
and Murphy, 1990), forced CEO turnover-performance
sensitivity (e.g., Denis and Denis, 1995), and the likelihood
of financial restatements (e.g., Armstrong et al., 2013).
The results are presented in Table A.7 of the Online
Appendix. The sample consists of Standard & Poor’s (S&P)
1500 manufacturing firms for CEO pay and turnover
analyses and all U.S. manufacturing firms for the financial
restatement analysis from 1996 to 2011.24 We find that
China-director has no effect on CEO pay-performance sensi-
tivity, forced CEO turnover-performance sensitivity, and the
likelihood of financial restatements. Thus, the monitoring
function performed by directors with China experience is
not significantly different from that performed by directors
without such experience.
Masulis et al. (2012) find that although firms with
FIDs make better cross-border M&As when the targets
are from the home regions of the FIDs, they experience
poorer long-run performance and a greater likelihood
of financial misreporting, suggesting that FIDs perform a
value-enhancing advisory role but not an effective mon-
itoring role. Given that our sample directors with China
experience include both Resident directors and Nonresident
directors, it is possible that the differences in results for
the monitoring role of directors with foreign experience
between Masulis et al. (2012) and our paper are due to
the fact that directors with China experience are more
likely to be located in the U.S., and hence, do not shirk on
their monitoring role. Our data provide a natural setting
to explore the importance of directors’ foreign experience
beyond Masulis et al. (2012) by examining whether firms
can obtain the benefits of having a FID—without the
corresponding costs—by appointing Resident directors.
To this end, we manually collect information on the
residence location of directors with China experience from
24
We thank Lalitha Naveen for providing data on CEO delta and Peters
and Wagner (2014) and Jenter and Kanaan (2015) for providing data on
forced CEO turnover. We obtain information on CEO compensation from
ExecuComp. Financial restatements include only those that involve fraud
(i.e., accounting restatements whose types are fraud, misrepresentation,
or an investigation by the SEC according to Audit Analytics).
499
various sources including company websites, Who’s Who,
and Wikipedia. We find that of 203 directors with China
experience whose residence locations are available, 104
are Resident directors and 99 are Nonresident directors.
We then replace China-director in the previous stock and
operating performance analyses with the proportion of
Resident directors with China experience on the board
(China-director domiciled in the U.S.) and the proportion
of Nonresident directors with China experience on the
board (China-director domiciled in foreign countries) and
reestimate the regressions.
The results are presented in Table 7. In Columns 1
and 2, the dependent variables are the CAR (−1, 1) and
Change in ROA for China deals, respectively. We find that
only the coefficient on China-director domiciled in the U.S
is positive and significant in both regressions. In Columns
3–7, we examine whether the monitoring role of directors
with China experience and their board meeting attendance
behavior are different between Resident directors and
Nonresident directors. We find that directors with China
experience, regardless of their residence location, have
no effect on pay-performance sensitivity and forced CEO
turnover-performance sensitivity (Columns 3–5). How-
ever, consistent with Masulis et al. (2012), we find that
China-director domiciled in foreign countries is positively
and significantly related to both the likelihood of financial
restatements and the likelihood of missing more than 25%
of board meetings in a year (Columns 6 and 7). In con-
trast, China-director domiciled in the U.S. is not significantly
related to these likelihoods.
These results suggest that firms can benefit from the
advisory role of directors with foreign experience without
sacrificing the monitoring efficiency when these directors
are domiciled in the same country as the appointing firms.
7. Summary and conclusion
In this paper we examine how U.S. Congress’ grant
of PNTR status to China in 20 0 0 affects U.S. firms’ board
structure and board advisory role. The grant eliminated
investment uncertainty in China faced by U.S. firms and
thereby increased the incentives of U.S. firms to exploit
China’s cheap labor and growing markets. We argue that
due to differences in consumer preferences, social norms,
and regulatory environments between the U.S. and China,
U.S. firms facing challenges in doing business with Chinese
firms adjust their board structure by hiring more outside
directors with China experience to narrow the gap in
these differences. These directors are expected to perform
a value-enhancing advisory role by helping U.S. firms
select suitable Chinese targets/partners, reducing infor-
mation asymmetry, and facilitating resource integration
between U.S. and Chinese firms.
In line with these arguments, we find that the propor-
tion of outside directors with China experience increases
significantly more for firms in high-NTR gap industries
than for those in low-NTR gap industries after the pas-
sage of PNTR. We also find that U.S. firms with a higher
proportion of outside directors with China experience
realize higher announcement returns and better long-term
operating performance for their China deals. Moreover, the
500 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

appointment of directors with China experience is greeted
more positively by the stock market. We further find that
the director labor market rewards directors with China
experience by providing more directorships in firms that
have strong demand for such experience after the passage
of PNTR. Finally, we find that the value-enhancing effect of
directors with China experience comes mainly from local
directors who are geographically close to the firms.
Overall, our paper shows that firms adjust their board
composition in response to changes in market demand
for director experience induced by a change in govern-
ment policy. Our paper also highlights the importance
of regional expertise obtained from prior experience for
directors’ advisory performance.

Appendix. Variable definitions

This appendix provides detailed descriptions of the variables used in the tables.

Variable Definition Source

All cash deal (indicator)
Board age
Board independence
Board tenure
Busy board
Capex
CEO-chair duality (indicator)
CEO tenure
CEO with block ownership
(indicator)
China-director appointment
(indicator)
China-director domiciled in the
U.S. (foreign countries)
China-director with recent
(early) work experience
China import penetration (CIP)
ratio in eight high-income
non-U.S. countries
China import penetration (CIP)
ratio in the U.S.
Currency strength (indicator)
Director age
Director from Ivy League
university (indicator)
Director tenure
Director with executive
experience (indicator)
Dummy variable that equals one if an M&A deal is purely SDC
cash-financed and zero otherwise
Average age of outside directors on the board BoardEx, Capital IQ, Electronic Data
Gathering, Analysis, and Retrieval
system (EDGAR), RiskMetrics
Ratio of the number of outside directors to the total number BoardEx, RiskMetrics
of directors on the board
Average tenure of outside directors on the board BoardEx, Capital IQ, EDGAR,
RiskMetrics
Ratio of the number of busy outside directors (directors who BoardEx, Capital IQ, EDGAR,
serve on three or more boards in other firms) to the total RiskMetrics
number of directors on the board
Ratio of capital expenditures to the book value of total assets Compustat
Dummy variable that equals one if the CEO is also the BoardEx, RiskMetrics
chairman of the board and zero otherwise
Number of years served as CEO RiskMetrics
Dummy variable that equals one if CEO equity ownership is RiskMetrics
more than 5% of a firm’s outstanding shares and zero
otherwise
Dummy variable that equals one for a treatment firm that BoardEx, Capital IQ, EDGAR,
appoints an outside director with China experience and zero RiskMetrics, Audit Analytics
for a control firm that appoints outside directors without
China experience
Ratio of the number of outside directors with China BoardEx, Capital IQ, EDGAR,
experience who reside in the U.S. (foreign countries) to the RiskMetrics
total number of directors on the board
Ratio of the number of outside directors with China BoardEx, Capital IQ, EDGAR,
experience that is obtained between year ˗7 and year ˗1 RiskMetrics
(prior to year ˗7), where year 0 is the director appointment
year, to the total number of directors on the board
Ratio of imports from China by firms in eight high-income David Dorn Website
countries (Australia, Denmark, Finland, Germany, Japan, New
Zealand, Spain, and Switzerland) to domestic manufacturing
absorption in these countries (industry shipments plus
imports minus exports) in 1988
Ratio of imports from China by U.S. firms to domestic David Dorn Website
absorption in the U.S. (industry shipments plus imports
minus exports) in 1991
Dummy variable that equals one if U.S. dollar appreciates Datastream
against the Chinese currency in a given year and zero
otherwise
Age of the outside director prior to the appointment year BoardEx, Capital IQ, EDGAR,
RiskMetrics
Dummy variable that equals one if the director graduated BoardEx, Capital IQ, EDGAR,
from an Ivy League university (Brown University, Columbia RiskMetrics
University, Cornell University, Dartmouth College, Harvard
University, Princeton University, University of Pennsylvania,
and Yale University) and zero otherwise
Tenure of the outside director prior to the appointment year BoardEx, Capital IQ, EDGAR,
RiskMetrics
Dummy variable that equals one if the director has executive BoardEx, Capital IQ, EDGAR,
experience (CEO, CFO, CIO, COO, president, VP, executive VP, RiskMetrics
senior VP, partner, managing director, and treasurer) prior to
the appointment year and zero otherwise
(continued on next page)
 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503
(continued)
Variable
Director with finance experience
(indicator)
Director with foreign experience
(indicator)
Director with JD degree
(indicator)
Director with manufacturing
experience (indicator)
Director with MBA degree
(indicator)
Director with Ph.D. degree
(indicator)
Diversification (indicator)
Diversifying M&A (indicator)
E-index
Executive China-director
Executive experience
Female board (indicator)
Finance experience
Firms having an outside director
with China experience
(indicator)
First China deal (indicator)
Foreign experience
Foreign sales ratio
Free cash flow
High tech (indicator)
Industry M&A
Industry-adjusted return
Joint venture (indicator)
501
Definition Source
Dummy variable that equals one if the director has financial BoardEx, Capital IQ, EDGAR,
experience (CFO or treasurer title or worked in banking, RiskMetrics
finance, and investment firms) prior to the appointment
year and zero otherwise
Dummy variable that equals one if the director has foreign BoardEx, Capital IQ, EDGAR,
experience (studied abroad or worked in non-U.S. firms) RiskMetrics
prior to the appointment year and zero otherwise
Dummy variable that equals one if the director has a JD (LLB) BoardEx, Capital IQ, EDGAR,
degree and zero otherwise RiskMetrics
Dummy variable that equals one if the director worked in the BoardEx, Capital IQ, EDGAR,
manufacturing industry prior to the appointment year and RiskMetrics
zero otherwise
Dummy variable that equals one if the director has an MBA BoardEx, Capital IQ, EDGAR,
degree and zero otherwise RiskMetrics
Dummy variable that equals one if the director has a Ph.D. BoardEx, Capital IQ, EDGAR,
degree and zero otherwise RiskMetrics
Dummy variable that equals one if a firm has multiple Compustat
business segments and zero otherwise
Dummy variable that equals one if the acquirer and the target SDC
have different first two-digit SIC codes and zero otherwise
Entrenchment index that is measured by summing the Investor Responsibility Research
indicators for staggered board, limitation on amending Center (IRRC)
bylaws, limitation on amending the charter, supermajority to
approve a merger, golden parachute, and poison pill
Ratio of the number of inside directors with China experience BoardEx, Capital IQ, EDGAR,
to the total number of directors on the board RiskMetrics
Ratio of the number of outside directors with executive BoardEx, Capital IQ, EDGAR,
experience (CEO, CFO, CIO, COO, president, VP, executive VP, RiskMetrics
senior VP, partner, managing director, and treasurer) prior to
the current directorship to the total number of directors on
the board
Dummy variable that equals one if the firm has a female RiskMetrics
outside director on the board and zero otherwise
Ratio of the number of outside directors with financial BoardEx, Capital IQ, EDGAR,
experience (CFO or treasurer title or worked in banking, RiskMetrics
finance, and investment firms) prior to the current
directorship to the total number of directors on the board
Dummy variable that equals one if the U.S. firm has an outside BoardEx, Capital IQ, EDGAR,
director with China experience and zero otherwise RiskMetrics
Dummy variable that equals one if the U.S. firm engages in a SDC
particular type of China deal for the first time during the
sample period and zero otherwise
Ratio of the number of outside directors with foreign BoardEx, Capital IQ, EDGAR,
experience (studied abroad or worked in non-U.S. firms) RiskMetrics
prior to the current directorship to the total number of
directors on the board
Ratio of foreign sales (non-domestic sales reported in Compustat
geographic segments) to total sales
Ratio of operating net cash flow minus common and preferred Compustat
dividends to the book value of total assets
Dummy variable that equals one if both the acquirer and the SDC
target (both partners) operate in the high-tech industries
defined by Loughran and Ritter (2004) and zero otherwise
Value of all M&A transactions (more than $1 million) in Compustat, SDC
foreign countries excluding the U.S. for each two-digit SIC
industry and year divided by the total book value of assets
of all Compustat firms in the same two-digit SIC industry
and year
Firm’s monthly stock return minus its corresponding CRSP
value-weighted two-digit SIC industry return in the previous
fiscal year. For a CEO turnover analysis, stock return is
compounded over the 12-month period that ends 30 days
before the CEO turnover announcement.
Dummy variable that equals one if the investment type is a SDC
joint venture and zero otherwise
(continued on next page)
502 S.-S. Chen, Y.-S. Chen and J.-K. Kang et al. / Journal of Financial Economics 138 (2020) 483–503

(continued)

Variable Definition Source

Leverage Ratio of the book value of debt to total assets, where the book Compustat
value of debt is the sum of long-term debt and debt in
current liabilities
Licensing agreement (indicator) Dummy variable that equals one if the agreement of joint SDC
venture or strategic alliance is related to licensing and zero
otherwise
Log (board size) Natural logarithm of the number of directors BoardEx, RiskMetrics
Log (firm size) Natural logarithm of a firm’s book value of total assets Compustat
Log (idiosyncratic volatility) Natural logarithm of the standard deviation of residuals from CRSP
Fama-French three-factor model regression using 252 daily
returns
Log (immigrants) Natural logarithm of the number of immigrants from China in U.S. Department of Homeland Security
a given year in the state where the firm is headquartered
M&A (indicator) Dummy variable that equals one if the investment type is an SDC
M&A and zero otherwise
Manufacturing agreement Dummy variable that equals one if the agreement of joint SDC
(indicator) venture or strategic alliance is related to manufacturing and
zero otherwise
Manufacturing experience Ratio of the number of outside directors who worked in the BoardEx, Capital IQ, EDGAR,
manufacturing industry prior to the current directorship to RiskMetrics
the total number of directors on the board
NTR gap 1999 (1990) Difference between the non-normal trade relations (NTR) tariff Peter K. Schott Website
rates and NTR tariff rates in 1999 (1990) for each four-digit
SIC industry
Old CEO (indicator) Dummy variable that equals one if CEO is between 63 and 66 RiskMetrics
years old and zero otherwise
Outside director shares Ratio of the sum of number of shares held by all outside EDGAR, RiskMetrics
directors to the total number of common shares outstanding
Past China investment Dummy variable that equals one if the U.S. firm engaged in SDC
experience (indicator) other China deals prior to the current China deal and zero
otherwise
Post (indicator) Dummy variable that equals one for a firm in the 2000−2011
period and zero otherwise
Price run-up Acquirer’s buy-and-hold abnormal stock return from day ˗210 CRSP
to day ˗11 before the M&A announcement, where day 0 is
the announcement date. The CRSP value-weighted return is
subtracted to compute the abnormal return
Private target (indicator) Dummy variable that equals one if the target is a privately SDC
held firm and zero otherwise
R&D Ratio of research and development expenses to the book value Compustat
of total assets
Return volatility Standard deviation of daily excess returns over the fiscal year CRSP, Compustat
Revealed NTR Ratio of duties paid to custom value for each four-digit SIC Peter K. Schott Website
industry in a given year
ROA Ratio of operating income after depreciation to the book value Compustat
of total assets
Smoot-Hawley non-NTR 1990 The Smoot-Hawley-based non-normal trade relations (NTR) Peter K. Schott Website
tariff rates in 1990 for each four-digit SIC industry
Stock deal (indicator) Dummy variable that equals one if an M&A deal is partly SDC
stock-financed and zero otherwise
Tobin’s q Ratio of the market value of assets to the book value of total Compustat
assets, where the market value of assets equals the book
value of total assets plus the market value of common
equity less the sum of the book value of common equity
and balance sheet deferred taxes

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