Effort allocation and governance effect of multiple-board independent directors: evidence from reputation and geographic proximity

Yi Quan and Donghua Chen

China Journal of Accounting Studies, 2016, vol. 4, issue 3, 287-307

Abstract: Using a sample of Chinese A-share listed companies from 2002 to 2013, we investigate how multiple-board independent directors allocate their effort and the consequences. The results indicate that: (1) Multiple-board independent directors do have a preference in their effort allocation. Specifically, more effort is allocated to companies which have a higher reputation and closer distance. (2) When directors are far from the firms they work for, their bias among companies with different reputation is easier to generate. (3) The multiple-board independent directors are more likely to leave firms with relatively lower reputation and farther distance due to poor accounting performance, even though their tenure has not expired. (4) Different allocation of effort results in different consequences. Specifically, the more directors who view the target firm as having a relatively higher reputation, the lower the CEO’s extra compensation, and the higher the sensitivity between compensation and performance; the more directors who view the target firm as being the relatively closer, the lower the CEO’s extra compensation. Providing evidence that multiple-board independent directors have a preference in their effort allocation, this paper not only contributes to the study of independent director characteristics and governance performance theoretically, but also has some policy implications on appointing director in practice.

Date: 2016
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DOI: 10.1080/21697213.2016.1222152

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