Rent-Seeking of Large Shareholders in Board Independence Arrangement : An Investigation on the Relationship between Pyramidal Structure and Board Independence in China

Independent director system is viewed as a mechanism to prevent large shareholders’ rent-seeking in companies. However, little attention has been drawn on the possibility that board structure itself may be manipulated by large shareholders for private interests. Using the percentage of independent directors on the board as a measure of board independence, this study investigates the effects of pyramidal structure on board independence to examine whether large shareholders manipulate board independence to facilitate rent-seeking. Results reveal that increases in the number of pyramid layers and the separation of cash flow and control rights reduce board independence; low board independence strengthens the positive effects of pyramid layer numbers and separation of the two rights on large shareholder expropriation. This empirical evidence indicates that, as board independence impedes large shareholders’ rent-seeking, the large shareholder agency problem exacerbates when the number of pyramid layers and the level of separation of the two rights increase, and large shareholders may attempt to reduce board independence to facilitate their expropriation