Independent Directors’ Diligence and Tunneling: An Investigation from Audit Committee

Abstract This study examines the impact of independent directors’ diligence within audit committees on mitigating controlling shareholders’ tunneling behavior. Specifically, this study explores how this mitigating effect performs under different frequency of audit committee meetings and geographical location of independent directors. The study also investigates the moderating roles of independent directors’ financial expertise and the quality of internal control. Using a multi-dimensional panel fixed effects model, this study reveals that the effectiveness of independent directors’ diligence in mitigating tunneling is more pronounced with higher audit committee meeting frequency and greater convenient geographical location. Moreover, the financial expertise of independent directors and strong internal control significantly strengthen this mitigating effect. This study contributes to the literature by expanding the understanding of independent directors’ role in corporate governance, highlighting the importance of both external governance mechanisms and internal control systems in reducing agency costs. The findings offer valuable policy implications for strengthening corporate governance practices in China. JEL Classification: M40; M41; G30