Predecessor-connected independent directors and controlling shareholders’ tunneling: The role of information sharing

In China, an independent director often recommends a successor at the end of their tenure, resulting in a predecessor-successor social connection, which has been overlooked in existing studies about corporate social networks. Using a sample of China's listed companies from 2007 to 2021 that have experienced changes in their independent directors, this study empirically examines whether predecessor-connected independent directors inhibit or exacerbate controlling shareholders' tunneling behavior. We find that the predecessor-successor social connection decreases the number of related-party transactions, and the mechanism is information sharing between predecessor and successor. Further analysis reveals the effect is more pronounced in companies with higher analyst following, lower research and development investment, and more effective internal controls. This study contributes to the literature on independent directors' social relationships and controlling shareholders' tunneling. Meanwhile, we provide implications for corporate governance practice and the reform of independent director systems in emerging markets, particularly regarding selection and appointment.