Journal of Business Ethics

, Volume 134, Issue 4, pp 693–708 | Cite as

Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China

  • Michael Firth
  • Sonia Wong
  • Qingquan Xin
  • Ho Yin Yick


We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator (the China Securities Regulatory Commission—the CSRC), and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms.


Business ethics Financial fraud Independent directors Regulatory sanctions Reputational damage in the labor market 

JEL Classification

G30 G34 J33 K22 M41 



We thank the reviewer for constructive feedback and suggestions. We also thank participants at the Conference on Sustainable and Ethical Entrepreneurship, Corporate Finance and Governance, and Institutional Reform in China (2013). Firth acknowledges funding support from the Government of the HKSAR (LU390113), and Xin acknowledges funding support from the National Natural Science Foundation of China (Project numbers: 71272087 and 71232004).


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Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Michael Firth
    • 1
  • Sonia Wong
    • 1
  • Qingquan Xin
    • 2
  • Ho Yin Yick
    • 1
  1. 1.Department of Finance and InsuranceLingnan UniversityTuen MunHong Kong
  2. 2.School of Economics and Business AdministrationChongQing UniversityChongqingChina

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