Abstract
Exploiting the mandatory disclosure requirement for independent directors’ votes in Chinese listed firms, this study investigates how penalties for information disclosure violations influence the dissenting behaviors of independent directors at firms with director interlocks. The results suggest penalties for information disclosure violations may encourage independent directors to express dissent on board proposals that are raised by director-interlocked firms. Further analyses show that as the severity of penalties increase, independent directors become more likely to express dissent, particularly about information disclosure issues. This dissenting behavior significantly improves the director-interlocked firm’s information disclosure quality and reduces the likelihood of being penalized for information disclosure violations. Finally, cross-sectional tests show that interlocked independent directors and independent directors with a background in finance, a greater reputation, and more power are more likely to dissent.
Acknowledgments
We are indebted to Jeffrey Ng (editor) and two anonymous reviewers for their constructive insights. We also appreciate helpful comments on the paper from Xiumin Martin and Chao Yin.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Supplemental Data and Research Materials
Supplemental data for this article can be accessed online at https://doi.org/10.1080/09638180.2024.2341766.
Notes
1 A director shall be responsible for the resolution of the board. If the resolution of the board of directors violates laws, administrative regulations, or the articles of association of the firm, resulting in severe losses to the firm, the directors participating in the resolution shall be liable for compensation to the firm. But if it is proved that the director expressed dissents during the voting process, the director’s liability can be waived.
2 In China, the announcement of firm penalties for information disclosure violations also leads to a negative market reaction for director-interlocked firms. Please see the online appendix 1 and online appendix 2 for these research results.
3 The coefficient of Eshock is 0.3084. This means that independent directors who work at the director-interlocked firms of penalized firms are expected to have log-odds of dissenting 0.3084 units higher than otherwise-identical independent directors who are not associated with penalized firms. To interpret it more intuitively, we calculate the economical meaning using the following formula: (e0.3084 −1) %≈36.12%.