Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China

Abstract

Abstract In response to corporate scandals in the early 2000s, the China Securities Regulatory Commission introduced a new reform requiring an increase in board independence. We find a significant decrease in tunneling by controlling shareholders for firms that are affected by this regulation, compared with firms that are exempt from it. The new added independent directors have an exclusively monitoring effect on controlling shareholders’ tunneling behaviors in state-owned enterprises. Furthermore, the decrease in tunneling behaviors is particularly pronounced in the subset of affected firms with less concentrated equity ownership, worse audit quality, and lower information processing costs. Our results suggest that controlling shareholders reduce the expropriation of minority shareholders under the monitoring of independent directors.