The Effects of the Appointment of Independent Directors Professionally Affiliated with Their Predecessors: Evidence from China
65 Pages Posted: 21 Apr 2019
Date Written: March 31, 2019
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: Suggested Citation