Risk Perceptions, Board Networks, and Directors’ Monitoring

62 Pages Posted: 24 Jun 2021 Last revised: 2 Mar 2022

See all articles by Wenzhi Ding

Wenzhi Ding

The University of Hong Kong - HKU Business School

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2022

Abstract

What makes independent directors perform their monitoring duty? One possible reason is that they are concerned about being sanctioned by regulators if they do not monitor sufficiently well. Using unique features of the Chinese financial market, we estimate the extent to which independent directors’ perceptions of the likelihood of receiving a regulatory penalty affect their monitoring. Our results suggest that they are more likely to vote against management after observing how another director in their board network received a regulatory penalty related to negligence. This effect is long-lasting and stronger if the observing and penalized directors share the same professional background or gender and if the observing director is at a firm that is more likely to be penalized. These results provide direct evidence suggesting that the possibility of receiving penalties is an important factor motivating directors.

Keywords: Director monitoring, regulatory penalties, board networks, board voting

JEL Classification: G34, G38

Suggested Citation

Ding, Wenzhi and Lin, Chen and Schmid, Thomas and Weisbach, Michael S., Risk Perceptions, Board Networks, and Directors’ Monitoring (February 28, 2022). Fisher College of Business Working Paper No. 2021-03-011, Charles A. Dice Center Working Paper No. 2021-11, European Corporate Governance Institute – Finance Working Paper No. 809/2021, Available at SSRN: https://ssrn.com/abstract=3872749 or http://dx.doi.org/10.2139/ssrn.3872749

Wenzhi Ding

The University of Hong Kong - HKU Business School ( email )

Hong Kong
China

HOME PAGE: http://wenzhi-ding.com

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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