Risk Perceptions, Board Networks, and Directors’ Monitoring

Wenzhi Ding, Chen Lin, Thomas Schmid and Michael Weisbach

No 28974, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What makes independent directors perform their monitoring duty? One possible reason is that they are worried 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.

JEL-codes: G34 G38 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-cfn and nep-gen
Note: CF
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Citations: View citations in EconPapers (1)

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Working Paper: Risk Perceptions, Board Networks, and Directors' Monitoring (2021)
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