Nonlocal Independent Directors And Corporate Frauds

It is an important decision to appoint an independent director.Statistically over half of Chinese listed companies appoint nonlocal professionals as independent directors which makes it a ubiquitous phenomenon.Long distances between the companies and independent directors help to gain advantages in independence,however it increases the difficulty and costs for independent directors to supervise the companies,thus influencing the effectiveness of corporate governance.Seting up independent directors in companies is a machnism to supervise the decision-making process inside the companies.Would it go against the original intention and purpose of regulators setting up independent directors in listed companies?This article studies the data of nonlocal independent directors from 2004 to 2013,which is collected manually to examine the supervision function of nonlocal independent directors,their effects on listed companies' frauds and moderating effects of institutional environment and external audit quality.Based on data from 10,931 corporates this study finds that:(1)the possibilities and number of times of companys'frauds occurance are significantly positively correlated with appointments of nonlocal independent directors.It means that appointing nonlocal independent directors increases the costs to get information and difficulty for independent directors to supervise the companies;(2)the institutional environment and enternal audit could significantly affect the effects.In less developed markets and in companies that are not audited by big 4 accounting firms,the positive effects from nonlocal independt directors are more significant.It may be caused by slack and omission of nonlocal independent directors due to corporates' less costs to fraud.The results go prudently while using Propensity Score Method and Instrumental Variable 2-Stage Least Squares model to test endogenous problems and using shorter distances to measure nonlocal independent directors.Further research suggests that nonlocal independent directors do have significant influences on corporates' tendency to fraud and have different degree of influences on different types of frauds and punishments.The possible contributions of this article include providing empirical evidence for impacts of geographical distance between listed companies and independent directors on their supervision function.On one hand,it provides investors'information to choose investment targets.On the other hand,it provides some enlightenments to regulators on how to improve the efficiency of supervision.In theory,it provides an indirect evidence that independent directors do have supervision function as supplement of corporate governance.Besides that,this article also enriches the literature of supervision function of independent directors,geographic location features and corporate frauds.