Covering or monitoring? Independent director connectedness and corporate fraud in China |
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Institution: | 1. Economics and Management College, Civil Aviation University of China, Tianjin, PR China;2. College of Management and Economics, Tianjin University, Tianjin, PR China;3. Business School, Sun Yat-Sen University, Shenzhen, PR China |
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Abstract: | This paper examines how independent directors’ social capital, as measured by their social network, affects corporate fraud. We find that firms with well-connected independent directors are less likely to commit fraud, supporting our monitoring effect hypothesis. This result is robust to a battery of tests. Further analyses show that the effect is stronger for firms with a relatively poor legal environment, for firms whose independent directors face strong reputation incentives and when independent directors are audit committee members. Moreover, we explore a potential economic mechanism of the effect and observe that well-connected independent directors are associated with less absenteeism and more dissension. Overall, our findings suggest that independent directors’ social capital plays an important role in corporate governance. |
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Keywords: | Corporate fraud Independent director connectedness Social capital Monitoring effect Bivariate probit model with partial observability G34 M41 Z13 |
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