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Risk Perceptions, Board Networks, and Directors’ Monitoring

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Listed:
  • Wenzhi Ding
  • Chen Lin
  • Thomas Schmid
  • Michael S. Weisbach

Abstract

What makes independent directors perform their monitoring duty? One possible reason is that they are worried about being sanctioned by regulators if they do not monitor sufficiently well. Using unique features of the Chinese financial market, we estimate the extent to which independent directors’ perceptions of the likelihood of receiving a regulatory penalty affect their monitoring. Our results suggest that they are more likely to vote against management after observing how another director in their board network received a regulatory penalty related to negligence. This effect is long-lasting and stronger if the observing and penalized directors share the same professional background or gender and if the observing director is at a firm that is more likely to be penalized. These results provide direct evidence suggesting that the possibility of receiving penalties is an important factor motivating directors.

Suggested Citation

  • Wenzhi Ding & Chen Lin & Thomas Schmid & Michael S. Weisbach, 2021. "Risk Perceptions, Board Networks, and Directors’ Monitoring," NBER Working Papers 28974, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28974
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    Cited by:

    1. Wang, Ziwei & Yao, Shouyu & Sensoy, Ahmet & Goodell, John W. & Cheng, Feiyang, 2022. "Learning from failures: Director interlocks and corporate misconduct," International Review of Financial Analysis, Elsevier, vol. 84(C).

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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