Macquarie University
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Undesirable societal outcome of investor protection: examining independent directors’ personal liability

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posted on 2023-11-02, 23:36 authored by Hongqi Wang

This study investigates whether enhancing legal responsibility for independent directors influences a firm’s engagement in greenwashing activities. Due to the increased liability for investor protection, independent directors focus more on monitoring the firm’s financial performance and so pay less attention to corporate social responsibility (CSR) practices. Meanwhile, firms may respond speculatively to enhanced financial oversight, leading to a higher likelihood of conducting greenwashing behavior. A quasi-natural experiment from China serves as the basis for this investigation, specifically, the enacted New Securities Act (NSA) reform in 2020, which increased personal liability for independent directors. The difference-in-differences results indicate that greater personal liability for independent directors promotes corporate greenwashing behavior. The results remain robust after a series of robustness checks.

The cross-sectional analysis reveals that this effect is more pronounced in non-state-owned enterprises with less gender diversity and lower external pressure, facing weaker environmental regulation and higher monitoring costs. To examine the underlying mechanism, the difference-in-difference-in-differences method is utilized. The findings demonstrate that the relationship between independent directors’ personal liability and corporate greenwashing behavior is transmitted through the accounting professionalism of independent directors and so the attention allocated to firms’ non-financial performance.

Further analysis indicates that firms’ greenwashing behavior resulting from independent directors’ diminished focus on CSR performance negatively impacts shareholder returns. These findings underscore the fact that firms may speculatively respond to heightened legal liability, undermining the primary reform goal of reinforcing investor protection and thus eroding corporate value.

This study makes significant contributions to the existing literature on director liability and investor protection. First, it investigates the impact of increased legal liability from the external regulator on corporate greenwashing behavior, emphasizing the associated undesirable consequences of introducing high personal responsibility to enhance investor protection. Second, the findings have practical implications for regulatory policy-making for promoting firms’ sustainable development.


Table of Contents

1. Introduction -- 2. Background and Hypothesis Development -- 3. Method -- 4. Results -- 5. Discussion and Conclusion -- References -- Appendices

Awarding Institution

Macquarie University

Degree Type

Thesis MRes


Master of Research

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Rui Xue

Additional Supervisor 1

Martina Linnenluecke


Copyright: The Author Copyright disclaimer:




71 pages

Former Identifiers

AMIS ID: 256793

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