Can Independent Directors Effectively Monitor Controlling Shareholders? Evidence from Hong Kong
46 Pages Posted: 25 Jun 2019
Date Written: June 21, 2019
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: Suggested Citation