Risk Perceptions, Board Networks, and Directors’ Monitoring

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