Working Paper: NBER ID: w28974
Authors: Wenzhi Ding; Chen Lin; Thomas Schmid; Michael S. Weisbach
Abstract: What makes independent directors perform their monitoring duty? One possible reason is that they are worried about being sanctioned by regulators if they do not monitor sufficiently well. Using unique features of the Chinese financial market, we estimate the extent to which independent directors’ perceptions of the likelihood of receiving a regulatory penalty affect their monitoring. Our results suggest that they are more likely to vote against management after observing how another director in their board network received a regulatory penalty related to negligence. This effect is long-lasting and stronger if the observing and penalized directors share the same professional background or gender and if the observing director is at a firm that is more likely to be penalized. These results provide direct evidence suggesting that the possibility of receiving penalties is an important factor motivating directors.
Keywords: Independent Directors; Regulatory Penalties; Corporate Governance; Monitoring Behavior
JEL Codes: G34; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observing a penalty imposed on a peer director (G34) | increased perceived risk of penalties among other directors (G34) |
| increased perceived risk of penalties among other directors (G34) | likelihood of voting against management proposals (G34) |
| observing a penalty imposed on a peer director (G34) | likelihood of voting against management proposals (G34) |
| observing a penalty imposed on a peer director (G34) | monitoring management more diligently (E63) |