Director interlocks and spillover effects of board monitoring: evidence from regulatory sanctions

Exploiting regulatory sanctions as quasi-exogenous shocks and unique data at the individual-director level from China, we examine whether board monitoring can spread between firms via shared directors. Our results show that a director experiencing regulatory sanction at another firm is more likely to attend the board meetings, indicating his or her greater monitoring efforts. We also find that a firm is more likely to provide transparent financial statement when it shares a common director with an accused firm, and the effect is mainly concentrated among non-state-owned enterprises. These findings shed new light on the positive role of director interlocks in spreading monitoring efforts after regulatory sanction.