An Empirical Research On The Relationship Between Independent Directors Network Location And Earnings Quality

Can independent directors play an effect role of governance? If they can, are there exist significant differences between the independent directors on the governance role? How should we depict the difference of governance role between independent directors? Since2001, China securities regulatory commission officially released on the guidance of establishing the independent director system of listed company, the independent director system preliminary established has amounted to more than ten years. However, the effectiveness of independent directors’ system has been widely debate by practice and academia. Practice person is generally believed that the independent directors are typical "human directors" and directors of "vase". Independent directors are not independent and fail to work effectively. Even many independent directors themselves also agreed with that they cannot play a role of effective governance to the company. Academic appears as two different factions: some scholars believe that the special background of capital market has become a mere formality of the independent director system in China. Another part of the scholars, through the company performance, agent problem, the surplus on investment efficiency, quality and management aspects of investigation of the independent director governance incentive effect, think that the independent director system in our country is able to exert governance effect to some extent.Recently, more and more scholars begin to pay close attention to the informal institutional constraints (relationship, culture, religion, etc.) affect the behavior of the independent directors. But overall, the research on network and governance is still at a preliminary stage. Especially the effectiveness of independent director system in our country and network governance is a great shortage of the research literature. The relationship between independent director network location and the quality of the surplus information research is rare, worthy of further in-depth analysis. Therefore, this article is based on social network analysis perspective, through the independent directors’position in their social relation network, to depict their governance capability. This paper first analysis with the relationship between the independent director with earnings quality. In addition, this paper focuses on the question that does the independent director’network governance can ultimately affect the ascension of the market value of listed companies and the increase of financial performance. Furthermore, we consider whether the nature of the heterogeneity of listed companies, will interfere with the effective role in the independent director governance. Finally, this paper further analysis and discuss the rationality of the independent director policy in China.On the basis of theoretical analysis and logical deduction, this paper argues that the independent director in the subordinate position in the network can have positive effects on their supervision power. In this paper, we found that:(1) The independent director system in China can play an effective role in improving the quality of earnings information.(2) The property nature of the heterogeneity of listed companies can make a significant difference on network governance effect of independent directors.(3) The independent director network governance role has been recognized by capital market investors.(4) Finally, the level of interlock independent directors can play a significant positive impact on the company within a certain range.This article is about the relationship between independent director network governance and earnings information quality. It is not only useful for better understanding the effectiveness of the independent director system in China, but also enriches our empirical research literature on network and governance. Especially in China, a country has thousands of year’s history culture and custom culture of ancient civilizations, all kinds of informal institution contact constraints are often play a more important influence. In this paper, based on the research perspective of informal institutional constraints (e.g. network), we have demonstrated the effectiveness of independent director system by social network analysis.First, this paper enriches the literature about the effectiveness of the independent director system, and director of network and management in the areas. Secondly, this article is helpful to explain the special social and cultural background in China. And it shows the relationship between contact constraints to the important influence to the individual behavior choice in China. This paper further enriches the literature on the research field of informal institutional constraints. Moreover, the comparison test on different property rights, help to further analysis of property rights to the effectiveness of independent director system in China. Finally, the article about the further discussion on the rationality of the independent directors of policy helps to attract shareholders of listed companies and stakeholders paying more attention to the independent director governance role. It also can give our country’s securities regulator some policy implications:they should appropriately use the flexible standard in the process of making policy.Limited by my own ability, the limitation of time and energy, and the objective conditions of constraints, this paper also exist many ways remains to be further improved. Through the study of this paper, we expect it is helpful for further study on the subsequent scholars in the field of the future. In addition, we expect this paper will be useful for regulators in the realistic economy, listed companies and stakeholders behavior choice, providing valuable research enlightenment and practical thinking.