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

35 Pages Posted: 23 Jun 2017

See all articles by Christopher C. Chen

Christopher C. Chen

Singapore Management University School of Law

Wai Yee Wan

City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law; Singapore Management University - School of Law

Wei Zhang

Singapore Management University

Date Written: June 23, 2017

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

Suggested Citation

Chen, Christopher C. and Wan, Wai Yee and Zhang, Wei, Board Independence as Panacea to Tunneling? An Empirical Study of Related Party Transactions in Hong Kong and Singapore (June 23, 2017). Available at SSRN: https://ssrn.com/abstract=2991423 or http://dx.doi.org/10.2139/ssrn.2991423

Christopher C. Chen (Contact Author)

Singapore Management University School of Law ( email )

55 Armenian Street
Singapore, 179943
Singapore

Wai Yee Wan

City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law ( email )

83 Tat Chee Avenue
Room P5300, 5th Floor, Academic 1
Kowloon Tong
Hong Kong

Singapore Management University - School of Law ( email )

55 Armenian Street
Singapore, 179943
Singapore

Wei Zhang

Singapore Management University ( email )

School of Law
55 Armenian Street
Singapore, 179943
Singapore

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