Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China

Ming, Gong; Wang, Yanan; Yang, Xiandong

doi:10.1016/j.econmod.2020.01.023

Cited by 32 publications

(22 citation statements)

References 35 publications

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“…In another study, Liu et al (2015) analyze the relationship between family control and cash holding policy in China and detect that family companies with excess control rights seem to have high cash holdings that are tunneled instead of being invested and/or distributed to shareholders. Given the long-standing tunneling behavior by the controlling families in the Chinese market, Gong et al (2021), however, suggest that controlling shareholders decrease the expropriation of minority shareholders under the monitoring of independent directors.…”

Section: Family Control and Agency Problems In Family Firmsmentioning

confidence: 99%

The influence of board independence on dividend policy in controlling agency problems in family firms

Kılınçarslan

2021

IJAIM

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Purpose This study aims to investigate the impact of board independence on the cash dividend payments of family firms listed on the Borsa Istanbul (BIST) in balancing controlling families’ power to mitigate agency problems between family and minority shareholders in the post-2012 period. The authors focus on this period because Turkish authorities implemented mandatory regulations on the employment of independent directors on boards from fiscal year 2012. Design/methodology/approach The research model uses a panel dataset of 153 BIST-listed family firms over the period 2012–2017, employs alternative dependent variables and regression techniques and is applied to various sub-groups to improve robustness. Findings The empirical results show a strong positive effect of board independence on dividend decisions. The authors further detect that family directorship exhibits a negative effect, whereas both board size and audit committees have positive influences but chief executive officer (CEO)/duality has had no significant impact on the dividend policies of Turkish family firms since the new compulsory legal requirements in the Turkish market. Research limitations/implications The findings suggest that independent directorship and dividend policy are complementary governance mechanisms to reduce agency conflicts between families and minority shareholders in Turkey, which is a civil law-based emerging country characterized by high family ownership concentration. Practical implications The authors present evidence that Turkish family firms’ corporate boards have evolved, to some extent, from being managerial rubber stamps to more independent boards that raise opposing voices in family decision-making. However, independent directors’ preference for dividend-induced capital market monitoring implies that their direct monitoring is less effective than it is supposed to be. This suggests a need to revise the Turkish Corporate Governance Principles to enhance independent directors’ monitoring and supervisory power. Originality/value This is thought to be the first study to provide insights on how board independence influences dividend policy in controlling agency problems in Turkish family firms since Turkish authorities introduced compulsory rules on the employment of independent directors on boards.

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Section: Family Control and Agency Problems In Family Firmsmentioning

confidence: 99%

The influence of board independence on dividend policy in controlling agency problems in family firms

Kılınçarslan

2021

IJAIM

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“…Dominant shareholders have incentives to maintain weak internal control systems to enable private benefits of control (Lee and Wang, 2017). Large owners seeking private benefits of control, including the expropriation of wealth from minority shareholders, may use their control to appoint both managers and directors that are aligned with them (Gong et al , 2021). In family firms, dominant shareholders are reluctant to appoint independent directors and generally prefer to establish boards that do not try to alleviate their discretion over decision making (Anderson and Reeb, 2004).…”

Section: Introductionmentioning

confidence: 99%

Ownership structure, board independence and auditor choice: evidence from GCC countries

Guizani

Abdalkrim

2021

JAEE

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PurposeThis paper investigates the role of board independence in determining the relationship between firm ownership and auditor choice.Design/methodology/approachThe research uses a logistic regression to test the direct and indirect effects of ownership structure on the decision to hire a high-quality (Big 4) audit firm. The sample consists of 207 non-financial firms listed on the Gulf Cooperation Council (GCC) countries stock markets between 2009 and 2016.FindingsEmpirical findings show that family ownership is associated with a negative and significant coefficient suggesting that an increase in family ownership decreases the likelihood that the firm will employ a Big 4 auditor. This finding suggests that family owners are reluctant to impose external monitoring. Furthermore, we find a positive relationship between institutional ownership and auditor choice supporting the conjecture that institutional investors are more likely to choose a Big 4 auditor. The results also reveal that the effects of family and institutional ownership on auditor choice are partially mediated by independent directors.Practical implicationsThis study has important implications for GCC economies whose policymakers and regulators may need to address the conflict between controlling and non-controlling shareholders. It provides guidance for firms in the construction and implementation of their own corporate governance policies. Furthermore, the study findings may be useful to investors, assisting them in making better informed decisions and aids other interested parties in gaining a better understanding of the role played by ownership structure in the quality of auditors. Finally, the paper highlights the importance of the composition of the board of directors in increasing the likelihood of hiring a high-quality audit firm.Originality/valueThe main contribution of the present paper is to examine the board composition as a potential mediating variable between ownership structure and auditor choice. Moreover, it highlights the issue of improving governance mechanisms.

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“…First of all, with the continuous improvement of the legal system of China's capital market, the supervision effect of independent directors is constantly emerging. Gong et al (2021) found that after the introduction of a new reform by China Securities Regulatory Commission requiring an increase in board independence, a significant decrease has been found in tunneling by controlling shareholders for firms that are affected by this regulation. Second, it is related to the characteristics of the enterprises; for example, in the non‐state‐owned enterprises, the supervision effect of independent directors is more significant than that of the state‐owned enterprises (Liu et al, 2016).…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

“…Consequently, independent directors should be “friendly collaborators” rather than “strict supervisors.” The independent director system is therefore limited to restriction on the major shareholders and the management, so as to protect the interests of the small and medium‐sized investors. However, more and more empirical studies show that with the increasingly strict system, the supervision effect of independent directors in China is gradually improved, especially for the state‐controlled enterprises and those with low degree of governance, and the protection effect of independent directors on small and medium‐sized shareholders is more significant (Gong et al, 2021; Kong et al, 2019).…”

Section: Introductionmentioning

confidence: 99%

Does the fellow‐villager relationship between the independent director and the chairman of the board can inhibit the major shareholder expropriation? Evidence from China

Cao²,

Wang

et al. 2021

Manage Decis Econ

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We studied the influence of the fellow‐villager relationship between the independent directors and the chairman of the board and found that the above relationship significantly eased the shareholder's encroachment. Furthermore, the above suppression effect is more significant in the poor formal institutional environment, and higher equity balance will weaken the restraining effect. At last, we revealed that the reputation mechanism presented the key factor that urged independent directors to exert influence on the decision of the chairman through the fellow‐villager relationship and, in turn, inhibited the encroachment.

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Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China

Cited by 32 publications

References 35 publications

The influence of board independence on dividend policy in controlling agency problems in family firms

The influence of board independence on dividend policy in controlling agency problems in family firms

Ownership structure, board independence and auditor choice: evidence from GCC countries

Does the fellow‐villager relationship between the independent director and the chairman of the board can inhibit the major shareholder expropriation? Evidence from China

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