Research On The Effectiveness Of Independent Director Reputation Incentive

"Listed companies on the establishment of an independent director system guidance" issued by the CSRC in August2001, shows that China’s domestic listed company officially introduced a comprehensive system of independent directors. However, this independent director system, which is prevalent in western countries, has suffered from the acclimatized phenomenon. Some independent directors turn into vase, some become an accomplice of the insider in the listed companies, and still others choose to be a deserter when the company is in the crisis. How to effectively motivate independent directors fulfill its oversight responsibilities actively has been an urgent problem. In the Anglo-American countries, incentives for independent directors mainly rely on reputation incentives, which are the core of the effectiveness of the independent director system.In order to explore the effectiveness of independent director reputation market so as to improve the independent director system in China, this paper selects the2004-2009listing companies which are announced irregularities by the regulator during2004to2009and manually collects personal information of the independent directors in these illegal companies. This paper adopts the stock abnormal returns of the illegal companies and the interlocked companies before and after the announcement of the violation by the event study method and market model, using (-200,-10) period for the estimation window and (-1,0)(-2,2)、(-5,5) three time periods as the event window, so as to examine the market reaction to the impairment of the independent directors’ reputation and study the impact on the director-interlocked companies’ value. This paper further studies the reputation punishment mechanism for independent directors both on the future employment opportunities and annual remuneration of the independent directors by comparing the number of independent director seats and and annual independent director salary in the violating year with those in three years later. Finally, this paper uses multiple linear regression model to study the influence of the different factors, consisting of personal factor、board factor and company factor, on the reputation mechanism of punishment for independent directors. Some results have been found as follows:(1) The greater responsibility of the independent directors taken in violation, the more serious economic interest losses are;(2) The higher personal ability or social status of the independent directors, the smaller the reputation punishment is;(3) The better performance of the listing company served by the independent directors and the higher praise by the market, the less serious economic interest losses are. The main contribution of this paper is to examine the existence of reputation incentive, which has laid a theoretical foundation to study the supervision behavior of independent directors.