Board Faultlines And Corporate Financial Behavior

The effectiveness of board governance has always been a key topic of concern in the academic and theoretical circles.Under the modern corporate system where ownership and management are separated,the board of directors shoulders the important responsibility of selecting,motivating and supervising management.Effective board governance can alleviate agency conflicts between shareholders and management,restrain management's self-interested behavior,and improve the overall corporate governance level.As the decisive factor of directors' behavior,director characteristics undoubtedly have a decisive influence on the behavior of the board of directors and the effectiveness of board governance.Therefore,it is very necessary to investigate the influence of directors' characteristics on the effectiveness of board governance from the micro-level.Scholars have also launched a series of rich explorations and discussions on this research topic,and gradually investigated the influence of the micro-personal characteristics of directors such as gender,age,tenure,educational background,and independence on board behavior and governance effectiveness.However,the existing research has never formed a unified logical framework and research conclusions.For example,some studies have found that independent directors improve company performance,while other studies have pointed out that independent directors have no or even a negative impact on company performance;some studies have found that directors with longer tenure have stronger supervisory capabilities,and some studies have pointed out that longer tenure Directors are more likely to infringe on company interests,etc.The main reason for this contradictory is that previous studies have investigated the influence on individual directors' behaviors from a certain characteristic dimension or part of the characteristic.This will ignore the influence of other important features,leading to the omission of important variables and other issues,resulting in biased and unstable research results.In order to solve the above research dilemma,Lau and Murnighan pioneered the faultline theory in 1998.The faultline is an imaginary dividing line that divides the board of directors into different subgroups based on similar characteristics.The faultline theory realizes the simultaneous and overall measurement of the characteristics of multiple directors,opening up a new direction for the research on the effectiveness of board governance.Based on this,this paper uses the faultline theory in management to integrate the multiple characteristics of the board of directors from the perspective of internal differences and recognition of the board of directors to achieve an overall measurement of the effectiveness of the board of directors.We attempt to find out whether the board of directors is divided and broken into different subgroups based on characteristics such as gender,age,financial experience,internal directors,part-time directors,independent directors,directors' tenure and shareholding ratio.How the existence of sub-groups will affect the effectiveness of the board of directors on management and the self-interested motivation of management,and how will it affect the financial behavior of the company?Specifically,this paper attempts to investigate: First,does the existence of the board's faultline affect the company's financial behavior? Second,are the effects of different types of board faultlines the same? Third,under heterogeneous conditions(such as different levels of internal control and external competition),are there differences in the above effects? Investment decisions and information disclosure decisions are important financial behaviors of the company,which have a profound impact on the company's future development and long-term operation.Therefore,this paper examines the impact of the board's faultline on the company's financial behavior from two aspects: investment decision-making(investment level,sensitivity of investment opportunities and company innovation)and information disclosure decisionmaking(voluntary performance forecast,financial restatement behavior,and stock price crash risk).This paper uses the data of China's A-share listed companies from 2007 to 2018 as the research sample.Based on the faultline theory,we explore the impact of the board faultline on the company's financial behavior from two aspects of company investment decisions and company information disclosure decisions.The main research contents and findings of this paper are as follows: First,in terms of corporate investment decisions,we empirically examine the impact of board faultlines on the company's investment level(underinvestment and overinvestment),investment opportunity sensitivity,and company innovation.We found that board faultline promoted the company's underinvestment without having a significant impact on overinvestment,reduced the sensitivity of investment-investment opportunities,and inhibited company innovation by reducing R&D investment.Further research shows that distinguishing the types of the board faultline,the impact of the deep board faultline is stronger than that of the surface board faultline,indicating that the impact of the deep board faultline is more lasting and far-reaching.As an internal governance mechanism,internal control can effectively suppress the negative impact of the board faultline,and alleviate the relationship between the board faultline and insufficient investment,investment-investment opportunity sensitivity,R&D investment;industry competition as an external The governance mechanism has also effectively suppressed the negative impact of the board faultline and has a mitigating effect on the above-mentioned relationship.In terms of corporate information disclosure decisions,this paper empirically tests the impact of the board faultline on voluntary performance forecasts,financial restatements and stock price crash risks.We found that the board faultline reduces the frequency of voluntary performance forecasts,promotes corporate financial restatements and increases the risk of future stock price crashes.This shows that the existence of the board faultline affects the company's information disclosure decision by reducing the quantity and quality of information disclosure.Further research shows that distinguishing the types of board faultline,the influence of deep board faultline is stronger than that of surface board faultline.as an internal governance mechanism,internal control can effectively buffer the negative relationship between board faultline and voluntary performance forecasts and the positive relationship betweet board faultline and financial restatement and stock price crash risk.industry competition as an external governance mechanism also has a buffer effect on the above relationship.This shows that the faultline has weakened the supervisory effectiveness of the board of directors over the management,leading to greater rent-seeking space and motivation for the management,thereby promoting the management's self-interest in the company's investment decisions and information disclosure decisions.The research of this paper has the following contributions.Fist,it expands the research on the effectiveness of board governance.This paper introduces the faultline theory,integrating eight characteristics of the board of directors,including gender,age,independence,and shareholding ratio,to measure the governance effectiveness of the board as a whole.Based on the new perspective of board faultline,this paper no longer only focuses on one or a few director characteristics and realizes the overall measurement of multiple characteristics.This beneficially expands the existing research on the effectiveness of the board of directors,and provides some practical enlightenment for how to construct the board of directors and improve the governance of the board of directors.Second,It examines the influence of the effectiveness of board governance on the self-interested motivation of management.At present,there are few literatures examining how the board faultline affects the governance effectiveness of the board of directors and thus affects the company's financial behavior.Our paper attempts to supplement this.We based on the perspective of the faultline is helpful to promote the in-depth understanding of the board structure and operation rules on the self-interest motives of the company's management and the impact of the company's investment decisions and information disclosure decisions.Third,Enriched and expanded research on the economic consequences of the board faultline.After the faultline theory was put forward,there are few literatures on how the board faultline affects the self-interested motivation of the management,and then affects the company's financial behaviors such as the company's investment decisions and information disclosure decisions.This paper provides a useful supplement.This paper also has certain practical enlightenment for the construction and improvement of governance structures of listed companies,as well as for the regulatory authorities and investors to recognize and prevent a series of risks that may be triggered by the self-interested motivation of management.For listed companies,the research conclusions of this paper provide a reference for collaborating with board members and constructing a reasonable board of directors.For the supervisory authority,our findings indicate that for companies with single and centralized director characteristics,the supervisory authority should pay more attention and issue relevant policy documents to regulate the board building of listed companies.For investors,investors can learn more about the composition of the company's board of directors and the background characteristics of the directors.Strengthen the overall understanding of the operation and governance effectiveness of the company's board of directors,make correct and reasonable investment decisions,avoid potential risks,and protect vital interests.