Covering or monitoring? Independent director connectedness and corporate fraud in China

This paper examines how independent directors' social capital, as measured by their social network, affects corporate fraud. We find that firms with well-connected independent directors are less likely to commit fraud, supporting our monitoring effect hypothesis. This result is robust to a battery of tests. Fur-ther analyses show that the effect is stronger for firms with a relatively poor legal environment, for firms whose independent directors face strong reputa-tion incentives and when independent directors are audit committee members. Moreover, we explore a potential economic mechanism of the effect and observe that well-connected independent directors are associated with less absenteeism and more dissension. Overall, our findings suggest that indepen-dent directors' social capital plays an important role in corporate governance. (c) 2022 Sun Yat-sen University. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecom-mons.org/licenses/by-nc-nd/4.0/).

Automated summary

This study finds that firms with well-connected independent directors are less likely to commit fraud, especially in firms with a poor legal environment and where independent directors face strong reputation incentives. Social capital of independent directors can help supervise corporate behavior by reducing absenteeism and increasing dissent.