The determinants and consequences of board faultlines : evidence from China : a thesis presented in partial fulfilment of the requirements for the Degree of Doctor of Philosophy in Accounting at Massey University, New Zealand

Abstract

This thesis examines how board faultlines, subgroup divisions arising from directors’ demographic and experiential attributes, shape corporate governance outcomes in China. To capture the multidimensional configuration of director attributes, the thesis employs the average silhouette width (ASW) algorithm to quantify board faultlines. Using 28,528 firm-year observations of Chinese A-share listed firms from 2008 to 2021, the thesis adopts an empirical, three-essay design that traces board faultlines from their formation context to their internal and external governance implications.

The first essay synthesises the literature on board faultlines and their measurement. Complementing this review is an exploratory empirical analysis of faultline patterns across firm life cycle stages and broad industry sectors. Using non-parametric comparisons, the evidence shows systematic variation in faultline strength across life cycle stages—specifically an inverted-U-shaped pattern that peaks in the growth stage—and pronounced differences between the secondary industrial sector and the tertiary service sector. The second essay examines the internal governance consequences of board faultlines for corporate innovation. The results show that stronger faultlines are positively associated with innovation output, and this association is partially explained by financial reporting quality. This is consistent with the notion that faultlines strengthen oversight and improve the information environment. State ownership weakens the innovation benefits. The third essay examines how board faultlines influence audit outcomes. The evidence indicates a significant negative association between faultlines and audit fees, and mediation analyses show that both financial reporting quality and audit report lag partially transmit this relationship. The audit fee reduction is stronger in firms with qualified foreign institutional investors, while the association does not differ significantly between the period under the One-Child Policy and the period following its relaxation. Endogeneity concerns are addressed using instrumental variables and inverse probability matching, and the findings are robust to alternative faultline measures.

Overall, the thesis provides China-based evidence that structured heterogeneity within boards is consequential for monitoring, information quality, and external audit outcomes. Rather than treating faultlines as uniformly detrimental, the findings highlight that board subgroup structures can be associated with governance benefits in China’s concentrated ownership environment, while also introducing coordination frictions that surface in audit timeliness.