INDEPENDENT DIRECTOR’S ATTRIBUTES AND TUNNELLING: THE MODERATING ROLE OF INTERNAL CONTROL

Abstract

Tunnelling, defined as the appropriation of corporate assets by controlling shareholders, presents substantial challenges to effective corporate governance and stakeholder protection. Independent directors are regarded as essential oversight mechanisms to curb such practices. However, much of the existing literature has concentrated on board diversity, with limited emphasis on the specific human capital characteristics that bolster the performance of independent directors. Addressing this research gap, the present study examines the impact of various attributes of independent directors—namely, financial expertise, political ties, equity ownership, and network centrality—on tunnelling behaviour within the context of Chinese firms. Drawing upon Resource Dependence Theory, the study explores how these human capital traits contribute to governance efficacy. Employing a dataset comprising 4,016 Chinese A-share listed companies over the period 2018 to 2023, the analysis utilises a Feasible Generalised Least Squares (FGLS) model to assess the effects of director attributes on tunnelling, with internal control quality considered as a moderating variable. The findings demonstrate that financial expertise, political connections, shareholding, and network position of independent directors are inversely related to tunnelling. Furthermore, the quality of internal controls strengthens the negative relationship between tunnelling and the attributes of financial expertise, shareholding, and network centrality, underscoring the importance of robust internal control systems in enhancing the monitoring role of independent directors. These insights offer practical implications for improving board functionality and curbing resource misappropriation in corporate governance frameworks.