Rookie Directors and Corporate Fraud

• DOI: 10.1561/114.00000012
• Publication Date: 2022-03-02T10:03:36Z
• Authors: Min Bai; Chia-Feng (Jeffre...
• Keywords: 0502 economics and business; 05 social sciences

This study examines how rookie independent directors (RIDs) affect corporate fraud. Using a large sample of Chinese listed firms, we find that firms with greater RID representation are more likely to commit fraud. Our result remains robust after controlling for numerous firm and board characteristics, director fixed effects, using alternative measurement, and employing an instrumental variable approach and an entropy balancing matching method. Moreover, the effect of RID representation on fraud is more pronounced for firms with non-Big Four auditors, less qualified foreign institutional investors and institutional ownership, more diversified businesses, related party transactions and intangible assets, and a higher than a critical mass of RIDs. Additional analysis finds that higher board meeting attendance of RIDs is not associated with lower fraud likelihood, strings of consecutive earnings increases mediate the positive relationship between RID representation and fraud, and firms with a rookie board have heightened fraud severity. Overall, our findings highlight that the monitoring efficiency of RIDs in countering fraud could be compromised by their lack of boardroom experience.