Rubber Stamp versus Gatekeeper? Short-Selling Deregulation and Independent Directors’ Dissensions

While agency theory contends that independent directors (IDs) play a major role in mitigating agency issues, prior research deeply doubts their monitoring effectiveness. To examine when IDs would properly perform their monitoring duty, we turn to the change in the external capital market and particularly investigate the role of short-selling deregulation in shaping IDs’ concrete voting behaviors within boardrooms. We argue that short-selling pressure improves information availability and transparency to enhance IDs’ monitoring ability as well as strengthens their monitoring incentive by inducing IDs’ perceived reputational concerns. Using a quasi-natural experiment in the context of China, we corroborate our hypothesis that after short-selling deregulation, IDs in treatment (versus control) firms significantly increase the likelihood and the number of their issued dissenting opinions on board proposals. Our mechanism tests confirm a surge of treatment (versus control) firms’ disclosed information quality and exposed reputational risk, as well as a reduced board meeting absence. Our further analysis indicates that through the IDs’ enhanced monitoring, short-selling deregulation ameliorates corporate governance by suppressing subsequent corporate fraud. Our study contributes to corporate governance research on IDs’ effectiveness and the interactive dynamics among different governance entities. © 2024 Academy of Management