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

Abstract

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.

Product market competition and controlling shareholders' tunneling: Evidence from China

“…The literature has kept growing since Johnson et al (2000) pioneered the concept of “tunneling” and related theories. Prior studies provide evidence of effective governance channels of tunneling behaviors, such as acquisition market (Bae et al, 2002), legal environment (Atanasov, 2005), information disclosure (Cheung et al, 2006; Wang et al, 2019), institutional ownership (Jiang et al, 2010), financial constraints (Peng et al, 2011) and board structure (Cai et al, 2019; Yu et al, 2021). This study complements this literature by highlighting the disciplinary role of product market competition in deterring controlling shareholders' tunneling.…”

Does hometown connection between chairmen and CEOs improve compensation–performance sensitivity in China?

“…People establish trust and are willing to exchange information on the basis of reputation. The term "fellow-villager circle" refers to a group that attaches great importance to the maintenance of its reputation (Yu et al, 2021). If the chairman and the CEO are from the same hometown, their personal reputation will spread rapidly within their circle of fellow villagers (Yu et al, 2022).…”

“…A strong hometown culture promotes a stronger sense of trust between people through similar thinking, which substantially affects their behaviour. One of the main manifestations of hometown culture is trust derived through familiarity (Yu et al, 2021). Thus, the fellow-villager identity is a widely observed social phenomenon in China.…”