The Effects of the Appointment of Independent Directors Professionally Affiliated with Their Predecessors: Evidence from China

65 Pages Posted: 21 Apr 2019

See all articles by Yanlin Li

Yanlin Li

Macquarie University - Department of Applied Finance, Students

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Xin Wang

Southwestern University of Finance and Economics (SWUFE) - School of International Business

Date Written: March 31, 2019

Abstract

The function of independent directors has been extensively documented, but the general question of how they are appointed remains insufficiently explored. We find that the likelihood of the appointment of candidates is higher when those candidates are professionally affiliated with departing independent directors, and this is more pronounced when there are personal ties between predecessors and insiders, an entirely compliant record of voting on the part of candidates or predecessors, and particularly in firms with higher-concentrated ownership and that are located in areas with a weak market environment. Moreover, the appointment of independent directors affiliated with their predecessors results in fewer dissenting votes, more related-party transactions, and a higher incidence and greater severity of violations. Our research shows that predecessor–candidate affiliation helps construct a reciprocity norm between successors and insiders, leading to weak board independence.

Keywords: Professional affiliation; Violations; Board voting; Board independence

JEL Classification: G34; M12

Suggested Citation

Li, Yanlin and Tian, Gary Gang and Wang, Xin, The Effects of the Appointment of Independent Directors Professionally Affiliated with Their Predecessors: Evidence from China (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=3363352 or http://dx.doi.org/10.2139/ssrn.3363352

Yanlin Li

Macquarie University - Department of Applied Finance, Students ( email )

North Ryde, NSW
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Xin Wang

Southwestern University of Finance and Economics (SWUFE) - School of International Business

555 Liutai Ave.
Chengdu, Sichuan, 611130
China

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