Board Structure and Intragroup Propping: Evidence from Family Business Groups in Hong Kong

Authors

  • Yan-Leung Cheung,

  • In-Mu Haw,

  • Weiqiang Tan,

  • Wenming Wang

    Search for more papers by this author
    • Yan-Leung Cheung is the President and Chair Professor of Public Policy at the Hong Kong Institute of Education. In-Mu Haw is a Professor of Accounting at the Neeley School of Business at Texas Christian University in Fort Worth, TX. Weiqiang Tan is an Assistant Professor of Finance at the Hong Kong Baptist University, Hong Kong. Wenming Wang is a Research Assistant Professor of Accounting at the Hong Kong Baptist University, Hong Kong.


Abstract

Using earnings announcement events made by group member firms in Hong Kong, this study examines the governance role of boards of directors in curbing propping activities within family business groups. We find that earnings released by group member firms affect the stock prices of their nonannouncing group peers in a manner consistent with intragroup propping. More importantly, this effect is less pronounced when the announcing firms have a larger board or a board with a higher proportion of independent directors, but more pronounced when they have an executive director from their controlling families acting as board chairperson. Furthermore, the monitoring effect of boards of directors is strengthened for firms subject to new regulations increasing board power. Our results suggest that board oversight can mitigate propping activities.

Ancillary