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Analysis on the appointment and governance behaviour of independent directors based on the reciprocity theory

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posted on 2022-08-12, 06:25 authored by Yanlin Li

In the framework of agency theory, independent directors are expected by investors in the market and institutions to independently monitor the behaviour of insiders to protect the interests of minority shareholders. However, the independence of directors being compromised has become more prevalent in practice; the reasons for which have been explored by many studies from different angles. Different from developed countries, China is characterised as having a weak institutional environment and a strong guanxi culture that emphasises the reciprocity relationship among individuals. Therefore, based on the reciprocity theory, this thesis provides an insight into what makes for a low level of independence in the appointment of independent directors and how independent directors act in corporate governance in the Chinese setting.  

This thesis firstly examines how independent directors are appointed through their affiliation with departing independent directors, and then their independence after the appointment. It proposes that independent directors who are affiliated with their predecessors are more likely to construct a reciprocity relationship with firm insiders. Consistent with this prediction, the thesis documents that the likelihood of the appointment of candidates is higher when those candidates are professionally affiliated with departing independent directors, and this is more pronounced when there are personal ties between predecessors and insiders, an entirely compliant record of voting on the part of candidates or predecessors. Moreover, the appointment of independent directors affiliated with their predecessors results in fewer dissenting votes, more related-party transactions, and a higher incidence and greater severity of violations. The present research shows that predecessor–candidate affiliation helps to construct a reciprocity norm between successors and insiders, leading to weak board independence.  

Secondly, this thesis investigates a more explicit norm of reciprocity between qualifying independent directors (QIDs) who are not qualified at the beginning of their appointment and insiders, based on the regulatory qualification requirements that a candidate has to complete a training course or promise to take a training course in a near future to become an independent director in China. The empirical findings show that QIDs are less likely to cast dissenting votes after their appointment and especially after they have qualified, and that firms with QIDs exhibit more expropriation and information opacity. The main results are robust to analysis of alternative explanations and endogeneity. Therefore, this thesis complements the literature by identifying a typical norm of reciprocity between QIDs and insiders, which leads to a loss of independence among QIDs.  

Finally, this thesis examines the influence of regional guanxi culture, which is a typical factor in the informal institution, on directors’ voting behaviour. The thesis finds that, in accordance with the social learning theory, the likelihood of casting a dissenting vote is lower when independent directors are appointed in locations with an intensive guanxi culture, which is pronounced in firms with a concentrated ownership structure and weak external governance, and weaker when the guanxi index of the director’s residence is lower than that of the firm. Moreover, independent directors who have dissented before the departure obtain fewer future directorships in local provinces with a higher guanxi culture. The results remain stable to analyses of various additional and robustness tests. I conclude that the directors’ monitoring effect is weak when the maintenance of interpersonal relationships is emphasised in the culture. 


Table of Contents

Chapter 1 Introduction -- Chapter 2 Effects of appointing new independent directors professionally affiliated with their predecessors: evidence from China -- Chapter 3 Courtesy calls for reciprocity: appointment of qualifying independent directors in China -- Chapter 4 Do in Rome as the Romans do: the effect of guanxi culture on the voting of independent directors -- Chapter 5 Conclusion -- Appendix A Variable definitions -- Appendix B -- Appendix C -- References


A thesis submitted in fulfilment of the requirements for the award of the degree Doctor of Philosophy

Awarding Institution

Macquarie University

Degree Type

Thesis PhD


Thesis (PhD), Macquarie University, Macquarie Business School, Department of Applied Finance, 2019

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Gary Tian


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