Board Independence as a Panacea to Tunneling? An Empirical Study of Related-Party Transactions in Hong Kong and Singapore

This article examines the effect of imposing higher board independence requirements on private benefit extraction by corporate management or controlling shareholders in Hong Kong and Singapore. This article shows that higher board independence negatively correlates with fewer related-party transactions (RPT), though in a nonlinear relationship with the marginal effect of higher board independence diminished. However, we find no clear causal effect of Hong Kong's imposition of a minimum board independence threshold in 2012 on reducing tunneling. Our data also show that higher concentration of ownership might not be associated with more tunneling by RPTs. Overall, this research lends support to the literature on the role of better corporate governance in addressing agency costs, although the exact effect of a particular change of corporate governance rules on tunneling is unclear, and there could be less utility in imposing even higher board independence requirements beyond a certain optimal level in the future.