Can Independent Directors Effectively Monitor Controlling Shareholders? Evidence from Hong Kong

46 Pages Posted: 25 Jun 2019

See all articles by Hong Huang

Hong Huang

City University of Hong Kong

Charles Zhen Qu

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

Haitian Lu

Hong Kong Polytechnic University

Date Written: June 21, 2019

Abstract

This paper studies whether and when independent directors monitor effectively in companies with controlling shareholders. Exploiting a 2004 regulatory change in Hong Kong that compelled some companies to increase the number of independent directors in a triple-differences setup, we find robust evidence that post-reform treated firms received 10.9-13.5% higher market abnormal returns on their announcement of “nonpropping” types of connected transactions. Moreover, treated firms reduced their use of connected transactions relative to arm’s length transactions by 14.9% in the postreform period. Taken together, our evidence suggests that independent directors, despite chosen by controlling shareholders, can safeguard shareholder value if an apposite legal design is put in place.

Keywords: independent directors, related party transactions, event study, Hong Kong

JEL Classification: G14, G32

Suggested Citation

Huang, Hong and Qu, Charles Zhen and Lu, Haitian, Can Independent Directors Effectively Monitor Controlling Shareholders? Evidence from Hong Kong (June 21, 2019). Available at SSRN: https://ssrn.com/abstract=3407959 or http://dx.doi.org/10.2139/ssrn.3407959

Hong Huang

City University of Hong Kong ( email )

Kowloon Tong
Hong Kong

Charles Zhen Qu

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
(852)3442-7692 (Phone)
(852)3442-0190 (Fax)

Haitian Lu (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

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