Abstract
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.
Published Version
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