Abstract
Selection of independent directors in China’s listed companies is a two-way choice dominated by listed companies. Thereafter, most companies adjust their independent directors after a mishap (e.g. receiving qualified audit opinions or punished by regulatory authorities). This paper investigates the behavior of how companies adjust their independent directors from the perspective of independent directors’ background, by using data of Chinese listed companies to which a mishap happened between 2002 and 2004 as our target sample. Evidence shows that listed companies will increase independent directors with accounting background significantly after receiving qualified audit opinions or punished by regulatory authorities, for the purpose of mitigating distress from capital market and medium and minority shareholders, which highlights the supervising role of independent directors with accounting background. Besides, these companies enjoy significantly contemporaneous return after the adjustment.
Highlights
Independent director system is widely believed as an important action to improve corporate governance and becomes the common choice among different corporate governance patterns [1]
This paper investigates the behavior of how companies adjust their independent directors from the perspective of independent directors’ background, by using data of Chinese listed companies to which a mishap happened between 2002 and 2004 as our target sample
Evidence shows that listed companies will increase independent directors with accounting background significantly after receiving qualified audit opinions or punished by regulatory authorities, for the purpose of mitigating distress from capital market and medium and minority shareholders, which highlights the supervising role of independent directors with accounting background
Summary
Independent director system is widely believed as an important action to improve corporate governance and becomes the common choice among different corporate governance patterns [1]. To better protect interests of medium and minority shareholders, China Securities Regulatory Commission (CSRC thereafter), one of the most important regulatory authorities in China’s capital market, issued guidance on establishing independent directors system in listed companies (the Guidance thereafter) on August 16, 2001, which gave birth to China’s independent directors system. Listed companies have autonomies in initial selections; they will be challenged by medium and minority shareholders or even punished by law when mishap happens. The question arises: will listed companies adjust independent directors as a means to mitigate pressures from regulatory authorities, capital market and medium and minority shareholder? We find that percentages of independent directors with accounting background increase significantly in mishap companies. Adding accounting professionals after a mishap can help companies mitigate distress from capital market and medium and minority shareholders, which highlights the supervising role of independent directors with accounting background.
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