Geographic Distance Between Independent Directors And Corporations And Corporate Agency Costs

In China,the independent director system is originally introduced to ameliorate corporate governance,make effective oversight and control on board rights,and protect the interests of small investors.However,independent directors are faced with endless doubts such as "not independent","not diligent" and "not professional"since they were introduced in 2001.It seems that independent directors are not lived up with their duties,i.e.being an internal monitor.In practice,it is not unusual to see that independent directors are absent from board meetings.To guarantee a necessary attendance rate,Internet voting has become a mainstream for independent directors to make comments.There is an intriguing but puzzling phenomona that many firms are inclined to hire local independent directors,while others prefer nonlocal independent directors despite the expensive transportation and time costs.So what role does the distance between independent director and firm play in corporate governance?What leads to the different preference among firms?To give an insight into these issues,in this study,we manually collect the working place of independent directors in Chinese A-share listed firms from January 1st 2004 to December 31st 2013.The large sample of data is investigated to reveal the association between the geographic distance between independent directors and corporations and agency costs.Taking the monitoring capability and independence into account,we find that:(1)there is a U-shaped relationship between independent director-firm distance and both Agency Costs I and Agency Costs II,after having characteristics of corporate governance and firm under control.This indicate that distant independent directors are weaker supervisor because that are at a disadvantage of access to private information and less motivated by reputation;while local independent directors may be less independent so that are more likely to collusion with firms.(2)Compared with non-state-owned enterprises(NSOEs)and firms in developed areas,this U-shaped relationship is more pronounced in state-owned enterprises(SOEs)and firms in underdeveloped areas.This may result from a more severe agency conflict between management and shareholders as well as support for less profitable parent company in SOEs,and a weaker institutional environment in underdeveloped areas.Our results are robust to a series of robustness checks,such as instrumental variable regression model,two-way cluster regression model,alternative of measurement of distance,and a different sample selection.Furthermore,we make an explore of the specific ways in which independent directors fulfilling duties,i.e.attending board meetings and making comments on issues,and find a lower attendance rate of distant independent directors.This provides a specific evidence for our findings.This study has several contributions academically and practically.First,this study enriches the researches on independent directors,and expands the boundary of the influence of geography on economic entities to independent directors.Meanwhile,our findings have meaningful implications for investors and policymakers,to help them recognize the severity of firm agency conflicts through distance between independent director and firm,a visible and conspicuous trait.Finally,our findings can help us to comprehend and evaluate the validity of independent director system more deeply and scientifically,and give references and support for regulating corporate governance and improving the design of the independent director system in China.