Are Cohesive Directors Beneficial With Governance Efficiency? Evidence From China

Abstract

Using unique data from Chinese board, we explore the governance effect of cohesive directorates (defined as the incumbent independent director has social ties with the former ones) which differ from interlock directorates. We find that the firms with cohesive directors are associated with significant and positive changes across a wide range of governance efficiency measures, including the financial reporting quality, the accuracy and dispersion of analyst forecasts, and the degree of efficient investment. The results are stronger for state-owned enterprises, for firms with cohesive director having accounting professional background, and when the cohesive directors are alumnus or fellow workers. Overall, this paper provides novel evidence on the governance function of social ties between current and former independent directors, and reveals the possible channel of independent directors’ nomination in weak intuitional capital markets.

Keywords: Cohesive Directorates; Social Ties; Nepotism; Governance Efficiency; China

JEL Classification: M40