Board Independence as Panacea to Tunneling? An Empirical Study of Related Party Transactions in Hong Kong and Singapore

Abstract

This article examines the effect by imposing higher board independence requirement on private benefit extraction by corporate management or controlling shareholders in Hong Kong and Singapore, which are both international financial centers transplanting the Anglo-American corporate governance model in the 21st century. We show that higher board independence does negatively correlate with fewer related party transactions (RPT), indicate that better corporate governance might have an effect of reducing tunneling through RPTs. However, we find no causal effect of Hong Kong’s imposition of minimum board independence threshold in 2012 on reducing tunneling. Our data also shows that a controlling having more ownership stakes does not necessarily mean more tunneling. Overall, this research lends support to existing literature on the role of better corporate governance in addressing agency costs, though the exact effect of a particular change of corporate governance rule on tunneling might be unclear if the rule is imposed and revised incrementally over time.

Keywords: Corporate Governance, Board Independence, Tunneling, Related Party Transaction, Independent Director, Hong Kong, Singapore

JEL Classification: K22