The Effects Of Characteristics Of Independent Directors On Enterprise Financial Risks

Under the background of global economic integration,the financial activities of enterprises must be faced with many uncertainties with the rapid expansion of capital market,the intensification of market competition and the growing complexity of social and economic environment.If those enterprises can not deal with the uncertainties brought by financial risk and financial activities,they will be also faced with greater challenges and may get involved in the financial crisis and even bankruptcy.Financial risk is a main form of risk facing those enterprises.It can be seen as a monetary reflection of various risks.Financial risk will increase the difference between the actual financial return and the expected return of the investors and cause the unrest in the capital market,thus affecting the rational investment of the investors.Financial risk and enterprise income have coexisted and also run through the whole process of financial activities.They have the features,such as being concealed and uncertain.At present,many listed enterprises in China are confronted with a high level of financial risk.Therefore,considering the fierce condition of market economy,it is worth researching how to judge the potential financial risk through the early-warning mechanism and then control and remove the risk in the field of enterprise financial risk.Corporate governance structure is an important part of modern enterprises.With the progress of the reform in the joint stock system in modern enterprises,the equity of listed enterprises has been decentralized.The separation between enterprise ownership and management right has become more obvious.Corporate governance has an increasingly more far-reaching influence on the enterprise operation.Due to the growing complexity of corporate governance structure,if the governance structure of an enterprise is not complete or flawed,it will affect the operation and financial status of the enterprise without doubt.It is also likely to bring about the financial risk and thus threaten the sustainable development of the company.As a key part of corporate governance structure,the independent director system will have a large influence on the decision making of the senior management,including the supervision and constraint of major shareholders and management,the protection of the legal interest of small-and-medium shareholders as well as the provision of external resources.It will also affect the financial risk of the enterprise without doubt.Although some listed enterprises have established the proper independent director system and also hope to prevent financial risk through corporate governance structure,how the governance of independent director can reduce the financial risk of listed enterprise is still unknown.Moreover,the route and effect of its influence mechanism still remain to be determined.Such questions are the urgent problems which should be solved in practice.Therefore,this paper is devoted to researching the relationship between independent director system and enterprise financial risk.However,what is not consistent with the urgent need in practice is that the research into the influence mechanism of independent director governance on the financial risk of listed enterprises is quite rare.Hence,by means of literature research,this paper is devoted to making a systematic analysis of the relationship between independent director governance and financial risk.The literature review found that although the previous research involves the effects of independent director governance on the financial risks of enterprises,most of them have not systematically explored the underlying mechanism.The role of external environment in the influence of independent directors on the financial risks of enterprises lacks of necessary attention;and whether the strategic behavior of management plays a mediation effect between the independent director governance with financial risk has not received sufficient attention.Besides summarizing the contributions and flaws of the existing researches,this paper has also identified the gap in the theoretical research.Based on the principal-agent theory and resource dependence theory,this paper has adopted empirical research to systematically analyze the functions of independent director,namely supervision,consulting and information,during the early-warning process of financial risk.The hypothesis about the positive influence of independent director governance on the financial risk of listed enterprises has been also put forward.Based on the relationship between independent director and the behavior of enterprise management,this paper has proposed the hypothesis regarding the mediating effect on the relationship between the diversification strategy behavior of the enterprise and independent director governance(financial risk).Considering that the research into enterprise behavior and management behavior are closely related to the institutional environment,this paper has also pointed out the moderating effect on the relationship between the institutional environment and independent director governance(enterprise financial risk).A conceptual model about how the independent director governance influences the financial risk of listed enterprises has been also built.After choosing 348 enterprises which go listed in the A-share market of Shenzhen and Shanghai as the sample,this paper has utilized the panel data to build a suitable data model.Further efforts have been made to empirically examine the main effect of independent director governance on the financial risk of listed enterprises,the mediating effect of independent director governance on the financial risk of listed enterprises as well as the moderating effect of the institutional environment.The research results show that the heterogeneity,proportion and duty-performing behavior of independent director have a remarkable influence on the financial risk of listed enterprises with the presence of controlled variables.In other words,the governance of independent director can play a role in giving early warning against the financial risk of listed enterprises.The comparison between the coefficients of the three factors shows that the duty-performing behavior of independent director will have a larger influence on the financial risk of listed enterprises compared with the heterogeneity of independent director.In addition,the heterogeneity of independent director has a greater influence on the financial risk of listed enterprises compared with the proportion of independent director.The research also shows that there is a mediating effect regarding the influence of diversification strategy on the heterogeneity of independent director as well as the influence of the duty-performing behaviors of independent director on the financial risk.The mediating effect regarding the relationship between the proportion of independent director and financial risk is not obvious.It means that the heterogeneity of independent director can help those enterprises collect the information about the market and industry.The duty-performing behaviors of independent director can help those enterprises better absorb the information gained.The final result of information collection is value creation.It will also prevent the sudden rise of enterprise financial risk.Finally,institutional environment can be classified as regional environment,industrial environment or internal governance environment.Regional environment can reflect the level of marketization.The region with a higher level of marketization will have more channels for gaining the resources and information.The results confirm the hypothesis that regional environment has a positive moderating effect of the main effect.Industrial environment can positively moderate the relationship between the heterogeneity and duty-performing behaviors of independent director and the financial risk of listed enterprises.However,it does not have an obvious moderating effect on the relationship between the proportion of independent director and the financial risk of listed enterprises.That is because the industrial environment is closely connected with the diversification strategy of the enterprise and the proportion of independent director is not closely related to the diversification strategy.Internal governance environment can positively moderate the relationship between the heterogeneity of independent director and the financial risk of listed enterprises as well as negatively moderate the relationship between the duty-performing behavior of independent director and the financial risk of listed enterprises.The research conclusion can not only expand and enrich the research scope of independent director and financial risk but also provide some theoretical and practical guidance for the evasion of financial risk in listed enterprises.Listed enterprises must make efforts to improve the heterogeneity of independent director,increase the proportion of independent director in the board of directors and regulate the duty-performing behaviors of independent director.They should also adopt the effective diversification strategy in the suitable institutional environment and improve the ability to give early warning against financial risk.