The Governance Effect Of Independent Directors’ Social Capital

In order to protect the shareholders’ interests and reduce agency costs,the independent director system has come into being and been an important governance mechanism in corporate finance.However,the independent director system in China needs to be improved.Most of the independent directors are nominated by the board of directors and elected by the shareholders,which weakens the independence of the independent directors.In addition,the release of “the Guidance on the Establishment of Independent Director System in Listed Companies” has led to the convergence of the ratio of independent directors among listed companies,causing the existing studies on independent directors’ governance role to fail to reach consistent conclusions.Social network analysis and social capital theory show that an individual’s behavior is not only influenced by their own characteristics,but are also related to others embedded in the network.This dissertation attempts to examine the governance effect of independent directors based on A-share Chinese listed firms.First,this dissertation studies whether independent directors’ social capital positively affects the future performance of firms,and then examines whether independent directors’ social capital significantly reduces the corporate fraud and stock price crash risk.Based on the above three empirical studies in this dissertation,we obtain the following conclusions:First,this dissertation finds that independent directors’ social capital significantly improves the future firm performance.In terms of economic significance,a onestandard deviation increase in independent directors’ social capital increases the future firm performance by 0.05%.This result is valid and pass the endogeneity tests and robustness tests.Further analyses reveal that the positive relationship between independent directors’ social capital and firm performance is more significant for nonstate-owned enterprises and firms with a high percentage of institutional investors’ shareholding.Moreover,we perform mechanism tests on three aspects: corporate social responsibility,stock price crash risk and corporate fraud,and find that firms with independent directors possessing higher social capital are more likely to voluntarily disclose social responsibility reports,independent directors’ social capital reduces stock price crash risk and corporate fraud,all of which result in independent directors’ social capital improving firm performance.Second,this dissertation finds that firms with independent directors possessing higher social capital are less likely to commit fraud,especially information-based fraud,supporting the ‘monitoring effect’ hypothesis.This result is robust to a battery of robustness tests and endogeneity tests.The further analyses show that the effect of independent directors’ social capital on corporate fraud is more prominent for firms with a poor legal environment,for firms with independent directors facing higher reputation incentives,and for audit committee members.Moreover,this dissertation analyzes the mechanism by which independent directors’ social capital reduces the corporate fraud and we observe that high-social-capital independent directors are associated with less absenteeism and more dissension.Third,this dissertation finds that firms with independent directors possessing higher social capital tend to have lower stock price crash risk.In terms of economic significance,a one-standard deviation increase in independent directors’ social capital decreases the likelihood of crash risk by 0.64%.This result is robust in instrumental variable regressions and propensity score matching regressions,and to alternative model specification and variable choices.Further analyses reveal that the negative impact of independent directors’ social capital on stock price crash risk is more prominent for non-state-owned enterprises,firms with strong external monitoring,and firms with high separation of ownership and control.Moreover,we observe that firms whose independent directors possess higher social capital have less financial opacity and corporate fraud.In conclusion,with the help of social network analysis and social capital theory,this dissertation corroborates the governance effects of independent directors from three aspects: firm performance,corporate fraud and stock price crash risk,promotes the effective integration of social network analysis and social capital theory with corporate governance and corporate finance,complements research related to the value of independent directors,and enriches theoretical research related to corporate fraud and stock price crash risk.This dissertation has important practical implications for listed firms,regulators,and investors.