Research On The Effectiveness Of Board Of Directors To Shareholders’ Tunneling

The unceasing development of capital market in China has been increasing the approaches to financing and boosting vitality of the listed companies. However, such an emerging market poses various problems, like unsound systems of information disclosure, incomplete protection mechanism of small investors and highly centralized ownership structures which lead to a serious problem of principal-agent relations between the large and small shareholders. The large shareholders tend to tunnel the listed companies by various subtle means for the purpose of private gains, which not only damages interests of the medium and small shareholders, but also hinders the sound and ordered process of China’s capital market. Therefore, it is of vital importance to conduct a research of the inhibiting impact of the governance mechanism within listed companies on the large shareholders’ tunneling behaviors. Starting with a dynamic aspect, large shareholders’ financial situation, this research probes into the questions of whether governance mechanism in the broad of directors can act as an effective control on the tunneling behavior and whether interlocking directors’ network can promote the effectiveness of the broad of directors.First of all, this paper introduced the theories of principal-agent and private benefits of control and analyzed the impact of the large shareholders’ financial situation on their tunneling, which is a dynamic tunneling motivation. Then inquired the governance functions of the board of directors as well as the conditions of functions and explored it’s influence path in the tunneling. In addition, established the financial distress index and added an interlocking directors’ network characteristic in the index system of board governance characteristics on the basis of social network theory to make up for the defect of it’s gradual homogeneity. Eventually, set up an econometrics model and tested it by referring to the data of the growth enterprises market during the period of 2010 to 2014 for an ultimate conclusion.Through the theoretical analysis and empirical examination, it comes to the conclusion that the large shareholders’ financial situation make a remarkable influence on their tunneling behaviors. They are more likely to tunnel the listed companies when they are in financial distress. The tunneling probability decreases with the increasing of independent directors and the decreasing of directors occupied by large shareholders. Nevertheless, other indexes such as board size, combined title of board chair and CEO as well as the board meeting frequency every year do not play significant roles. Although the interlocking directors’ network can restrain the tunneling of large shareholders theoretically, it is not significant in the empirical examination. The uncertainty of external environment, a mere formal interlocking directorates nomination institution, unscientific compensation incentive policies or other reasons maybe result that the effectiveness of interlocking directors’ network in growth enterprise market has not yet been exerted adequately. To avoid the large shareholders’ tunneling behavior, listed companies should monitor the financial situation of major shareholders constantly. At the same time, it is vital to strengthen the independence of board of directors and establish an effective interlocking directors’ network.