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Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China

Author

Listed:
  • Michael Firth

    () (Lingnan University)

  • Sonia Wong

    () (Lingnan University)

  • Qingquan Xin

    () (ChongQing University)

  • Ho Yin Yick

    () (Lingnan University)

Abstract

Abstract We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator (the China Securities Regulatory Commission—the CSRC), and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms.

Suggested Citation

  • Michael Firth & Sonia Wong & Qingquan Xin & Ho Yin Yick, 2016. "Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China," Journal of Business Ethics, Springer, vol. 134(4), pages 693-708, April.
  • Handle: RePEc:kap:jbuset:v:134:y:2016:i:4:d:10.1007_s10551-014-2391-5
    DOI: 10.1007/s10551-014-2391-5
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    References listed on IDEAS

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    Cited by:

    1. Douglas Cumming & Wenxuan Hou & Edward Lee, 2016. "Business Ethics and Finance in Greater China: Synthesis and Future Directions in Sustainability, CSR, and Fraud," Journal of Business Ethics, Springer, vol. 138(4), pages 601-626, November.

    More about this item

    Keywords

    Business ethics; Financial fraud; Independent directors; Regulatory sanctions; Reputational damage in the labor market;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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