The economic independence of supervisory boards and corporate innovation: Evidence from China

The capability of the supervisory board to fulfill its governance function has been controversial, and one of the key issues is which type of supervisory board is more effective. Using data of Chinese A-share listed firms, this paper reveals a positive relationship between the economic independence of the supervisory board (EISB) and firm innovation, which is robust after addressing potential endogeneity issues. Moreover, this positive association is more pronounced for state-owned enterprises, firms with weaker external corporate governance, longer-tenured CEOs, and a stable internal environment. Additional analysis reveals that the EISB also enhances corporate innovation quality. Finally, the channel analysis shows that the EISB promotes innovation by alleviating corporate tunneling, and we find no evidence of improved independent directors' performance. Overall, this paper enriches and expands the literature on the effectiveness of the supervisory board in emerging economy and provides new insights for improving corporate innovation.