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Board Structure and Informativeness of Earnings
Abstract
This study draws on prior research on corporate governance and examines whether the informativeness of earnings, proxied by the earnings–returns relationship, varies with the fraction of outside directors serving on the board and board size. The results suggest that earnings of firms with the smallest boards in the sample (with a minimum of five board members) are perceived as being more informative by market participants. By contrast, there is no evidence that board composition mitigates the earnings–returns relation. Policy implications are discussed.
... A inquietação manifestada por reguladores e demais órgãos e instituições ao redor do mundo atravessou a barreira pragmático-normativa e progressos também foram observados no campo da pesquisa empírica direcionada a observar a influência de Conselhos de Administração sobre o conteúdo das Demonstrações Contábeis. A partir dos anos de 2000 investigações passaram a examinar com desvelo o impacto de características próprias de Conselhos de Administração como tamanho, longevidade e composição sobre aspectos da informação contábil, tais como, Gerenciamento de Resultados, Conservadorismo, Informatividade e Relevância da Informação Contábil (Vafeas, 2000;Klein, 2002;Beeks, Pope, & Young, 2004;Ahmed, Houssain, & Adams, 2006;Firth, Fung, & Rui, 2007;Dimitropoulos, & Asteriou, 2010;Alves, 2011;Holtz, & Sarlo, 2014). ...
... Especificamente, espera-se que quando Conselhos de Administração apresentam desempenho eficaz no processo de monitoramento da gestão e que os valores contábeis guardem correlação ao preço das ações, mostrando-se úteis ao investidor. Vafeas (2000) evidencia que a capacidade informativa dos lucros sobre o retorno das ações se torna uma relação mais pronunciada em corporações cujos Conselhos de Administração são menos numerosos, embora não tenha observado a mesma intensidade ao examinar o poder de moderação de conselheiros outsides nessa relação. Habib e Azim (2008) evidenciaram que a Relevância da Informação Contábil é influenciada pelo tamanho do Conselho de Administração e, diferente de Vafeas (2000), observaram que a independência do Conselho tem efeito sobre a Relevância da Informação Contábil. ...
... Vafeas (2000) evidencia que a capacidade informativa dos lucros sobre o retorno das ações se torna uma relação mais pronunciada em corporações cujos Conselhos de Administração são menos numerosos, embora não tenha observado a mesma intensidade ao examinar o poder de moderação de conselheiros outsides nessa relação. Habib e Azim (2008) evidenciaram que a Relevância da Informação Contábil é influenciada pelo tamanho do Conselho de Administração e, diferente de Vafeas (2000), observaram que a independência do Conselho tem efeito sobre a Relevância da Informação Contábil. Embora seja possível encontrar resultados contrários (Alkdai E Hanefah, 2012), as evidências apontam majoritariamente que características estruturais dos Conselhos de administração afetam significativamente a relação entre saldos contábeis e preços de ações, tornado, portanto a informação contábil mais útil ao investidor (Ahmed, Hossim, & Adams, 2006;Firth, Fung, & Rui, 2007;Holtz, & Sarlo Neto, 2014). ...
Esse estudo tem como objetivo examinar a influência do Board Interlocking sobre a Qualidade da Informação Contábil determinada a partir de um conjunto de métricas de Gerenciamento de Resultados, Tempestividade e Relevância da Informação Contábil denominada de Portfolio Approach proposta por Barth, Landsman e Lang (2008), adicionado do Conservadorismo Condicional. Neste estudo, postula-se que o poder de monitoramento de Conselheiros pode ser enfraquecido pelas múltiplas conexões entre Conselhos e Diretorias. Nessa direção, foram formuladas quatro hipóteses de que o Board Interlocking exerceria efeito negativo sobre a Qualidade da Informação Contábil aumentando o Gerenciamento de Resultados (H1), diminuindo o Conservadorismo (H2), a Tempestividade (H3) e a Relevância da Informação Contábil (H4). A população-alvo da pesquisa é o conjunto de empresas de capital aberto que divulgaram Formulários de Referência nos anos de 2010 a 2015 por meio do website da Comissão de Valores Mobiliários. Os resultados mostraram que 79,34% das empresas abertas brasileiras realizaram Board Interlocking. Entretanto, somente 17,83% do contingente de mais de 6000 integrantes de Conselhos de Administração, Diretorias Executivas e Conselhos Fiscais formaram a totalidade das conexões no Brasil. Os principais resultados alcançados são de que Gerenciamento de Resultados, Conservadorismo e Tempestividade da informação contábil são indiferentes à incidência do Board Interlocking. No entanto, em favor da hipótese H4, foi possível observar maior Relevância da Informação Contábil ante a menor incidência de conexões.
... As a weak practice of corporate governance according to the agency theory assumption, Jensen (1993) stated that internal control system efficiency and financial performance are enhanced by a smaller board directors. Prior research has confirmed the positive influence of a smaller board on a company's sustainability (e.g., (Platt & Platt, 2012;Rajeevan & Ajward, 2019;Shah, Rashid, & Shahzad, 2019;Vafeas, 2000)). Likewise, Al-Jaifi (2017) found that a high concentration of ownership leads to the manipulation of earnings information for informative purposes. ...
... Several studies have concluded that firms with large boards are associated with reducing and effectively detecting earnings management (Ebrahim, 2007;Yu, 2008). However, other studies have revealed that a smaller board size is more likely to limit earnings management practices (Vafeas, 2000). Based on the aforementioned arguments and contradictory findings regarding the influence of board size on earnings management, the current study investigates board size as a proxy for the influence of the resource dependence role on earnings management practices by testing the following hypothesis: ...
... As the main responsibility of the board, agency theory suggests monitoring to alleviate the conflict of interest between management and owners and to reduce the costs of agency problems. In this sense, this study investigates the frequency of board meetings as a proxy for the monitoring role of earnings management practices (Jensen, 1993;Vafeas, 2000;Wijethilake, Ekanayake, & Perera, 2015). Vafeas (2000) argued that a lower number of meetings is followed by the tendency of management to behave contrary to the interests of the shareholders. ...
The purpose of this research is to examine the effects of corporate governance structures on earnings management behavior in a weakly governed and politically unstable environment. A panel of data from 35 non-bank companies listed on the Palestine Exchange between 2012 and 2019 was employed. A fixed effects regression model was used to examine the impact of certain board characteristics (board size, board meetings, and audit committee formation) and ownership structures (institutional ownership, foreign ownership, and ownership concentration) on earnings management in the volatile and risky political and economic environment of Palestine. The findings indicate that corporate governance and ownership systems in Palestine appear to be ineffective in constraining earnings management practices. None of the board attributes appear to constrain earnings management practices. However, there is weak evidence to show that ownership concentration has some effect in curbing earnings manipulation. The findings of this study are expected to increase awareness among Palestinian regulators, investors, and other policymakers regarding the role of boards of directors and institutional and foreign shareholders in monitoring Palestinian listed companies to enhance corporate governance and the quality of financial reporting.
... However, there are still some limitations in previous studies, namely the elements of governance variables used by researchers in testing their relationship with the relevance of accounting earnings information are still partially done. Like Vafeas (2000) who only looked at the proportion of the board of directors, Attig et al. (2008) only looked at multiple large shareholders, while Woidtke and Yeh (2013) only looked at the role of the audit committee. Previous research that has been conducted by Almujamed and Alfraih (2020) uses the Ohlson Valuation Model which measures earnings per share, while this study uses a Return-Model which has also been used in previous studies because this measurement can describe earnings informativeness and its correlation with stock returns, thus it can describes investors' perceptions of the relevance of earnings accounting (Woidtke and Yeh, 2013). ...
... This shows that the size of the board of commissioners can affect investors' perceptions of earnings information. This is in line with the statement from Vafeas (2000) which says that the size of the board of commissioners can affect the value relevance of earnings information. When the company has a small board of commissioners, the relevance of earnings information will be smaller, because the cost of monitoring is large because it is unable to monitor the quality of the company's financial statements. ...
The relevance of accounting earnings information is needed to help users of financial statements to make a decision. This research intends to expand previous empirical studies by examining more comprehensive corporate governance variables, which are the proportion of audit committees and commissioners, the role of financial accounting experts in the audit committee, and ownership structure to increase the relevance of accounting earnings information. The aim of this research is to examine whether controlling function held by the company in order to perform good corporate governance can affect to the informativeness of accounting earnings in Indonesia. This research method uses Pooled Least Square (PLS) with total sample 327 firm-year observations of Indonesian public companies from 2017 to 2019. The result shows that the existence of effective controling function by multiple large shareholder, accounting expert, audit committee, and board size can increase the relevance of earnings information that rely on financial statement. This research findings could be as an additional literature in financial accounting and corporate governance area, and also for practitioners in manufacturing company in Indonesia that if a firm has good controlling function, it can provide relevant information about earnings to shareholders.
... The board of directors should carefully determine the optimum number of board members to ensure that there are enough members to discharge responsibilities and perform related duties. The studies show that firms that report high quality earnings are more likely to have smaller board (Eisenberg, Sundgren, and Wells, 1998;Mak and Kusnadi, 2005;Vafeas, 2000;. Although some studies argue that larger boards are better as they have greater capability to safeguard shareholder interest (Zahra and Pearce II, 1989), a broader range of experience (Xie et al., 2003), and varied expertise (Rahman and Ali, 2006), there are also empirical studies that show that smaller boards are more effective than large boards ensuring higher firm value (Eisenberg et al., 1998), more informative (Vafeas, 2000), better communication and more timely decision-making (Karamanou and Vafeas, 2005), more coordinating directors efforts (Eisenberg et al., 1998;Jensen, 1993;. ...
... The studies show that firms that report high quality earnings are more likely to have smaller board (Eisenberg, Sundgren, and Wells, 1998;Mak and Kusnadi, 2005;Vafeas, 2000;. Although some studies argue that larger boards are better as they have greater capability to safeguard shareholder interest (Zahra and Pearce II, 1989), a broader range of experience (Xie et al., 2003), and varied expertise (Rahman and Ali, 2006), there are also empirical studies that show that smaller boards are more effective than large boards ensuring higher firm value (Eisenberg et al., 1998), more informative (Vafeas, 2000), better communication and more timely decision-making (Karamanou and Vafeas, 2005), more coordinating directors efforts (Eisenberg et al., 1998;Jensen, 1993;. ...
This research paper talks about the effect of corporate governance on bank performance in the Arabian Peninsula
... On the other hand, small boards are more effective in monitoring and performing their duties and insuring faster information processing (Zahra, et al., 2000). This indicates that the monitoring quality of the board is negatively affected by its size (Vafeas, 2000). ...
... show a negative relation between the effect of board size and return on equity of a sample of European economies.Vafeas (2000) with a sample of 307 US public companies finds that market participants perceive earnings of companies with smaller boards as more informative. The study ofCerbioni and Parbonetti (2007) shows a negative relationship between board size and voluntary intellectual capital disclosure in a sample of European biotechnology companies. Recentl ...
The rapid changes in business environment make companies more relying on financial instruments and international transactions, which raise the importance of the risk reporting issues. Moreover, the major accounting scandals and corporate collapses of the early 2000’s and the global financial crisis of 2008-2009, have attracted increased attention of the risk disclosure and risk management practices. Although risk reporting practices have attracted a great deal of interest, less attention has been paid to empirical research on Corporate Risk Disclosure (CRD), which mostly conducted in developed countries. This study deals with this gap through investigating CRD practices in a developing country with different social, economic, and institutional contexts, namely, the Kingdom of Saudi Arabia.
This study specifically focuses on CRD being a unique type of corporate disclosure. Beside the information on opportunities and good news, CRD involves negative information related to hazard, danger, harm, threat or exposure that has already affected the company or may affect the company in the future, which is of great importance for decision-making and rarely provided by other types of disclosure. Saudi Arabia suffers from a lack of transparency and low level of awareness of CRD because corporate governance and CRD practices are still relatively new topics. Saudi financial market is still beginner and less developed and the regulations and governance are still weak with a high concentrated ownership and dominance of controlling shareholders, such as family, institutional, government, and blockholder ownership, which are expected to have significant and mixed effects on CRD. There is no study, so far, investigated CRD practice and its determinants in Saudi Arabia.
Therefore, the main objectives of this study are to explore the level and nature of CRD, in addition to investigate the determinants of the level of CRD in the annual reports of the Saudi non-financial listed companies. Using the content analysis, the extent of CRD in the annual reports is measured based on the number of risk-related sentences. Regarding the nature or content of CRD, risk-related sentences are classified into four main quality dimensions, namely, type of risk disclosure (financial and non-financial), form of disclosure (quantitative and qualitative), time frame of disclosure (future and past, present, or non-time-specific), and type of news (bad, good, and neutral). To investigate the influence of corporate governance mechanisms and ownership structure, in addition to firm-specific characteristics on the level of CRD, this study employs the panel data analysis of a sample of 307 annual reports over the period from 2008 to 2011, in addition to the cross-sectional analysis of a sample of 85 annual reports of 2011.
... In this vein, Lipton and Lorsch (1992) find that increasing the number of the board reduces the efficiency of decision making in the company. Small boards can perform better and reduce free-rider problems (Yermack 1996;Loderer and Peyer 2002) and improve the quality of the firms' reports (Vafeas 2000;Alonso et al. 2000;Nguyen and Faff 2007). De sa part, Vafeas (2000). ...
... Small boards can perform better and reduce free-rider problems (Yermack 1996;Loderer and Peyer 2002) and improve the quality of the firms' reports (Vafeas 2000;Alonso et al. 2000;Nguyen and Faff 2007). De sa part, Vafeas (2000). ...
This paper investigates how corporate governance quality affects the analyst’s stock recommendations, forecast efficiency and target price accuracy on New York Stock Exchange. In particular, as corporate governance is often uncertain and ambiguous to investors, expert financial advisors may use transparent corporate governance information to set their recommendations and improve the level of accuracy of their earnings forecasts. According to agency and signaling theories, good governance mechanisms aim to mitigate agency conflicts and boost corporate transparency. Thus, we argue that they can serve as mediators during the forecasting process and we expect a strong significant relationship between the effectiveness of corporate governance mechanisms and analyst activity. Five hypotheses are tested with a large sample of 154 US market firms over a 17-year period (2004–2020). Our empirical findings point out some special features of US stock markets. We find evidence that analysts tend to issue favorable recommendations, more accurate, less dispersed and more optimistic earnings forecasts for most well-governed firms. Furthermore, we show that higher-quality governance transparency is an important determinant of financial analysts’ behavior in the USA. The results also indicate that higher-quality governance appears valuable with financial analysts during pre- and post-crisis period, while it is not generally detected in COVID-19 times. However, we report the weakness of analysts’ outputs–governance quality for small firms. Thus, our findings cast doubts over the corporate governance-based analyst practices of US small and unaffiliated firms. The main implication of these findings is to improve understanding of how investors’ behavioral characteristics affect the transmission mechanism of information in money market and capital market prices. This paper has important implications for the decision making of financial analysts and investors by requesting firms to significantly improve their information environments in the good and bad times. It also offers insights into how firms establishing good corporate governance mechanisms can help the analysts to predict future stock prices.
... The board's ability to monitor managers and apply pressure to compel them with shareholders' wishes is improved by the board's independence and seniority (Beasley, 1996). Independent directors have the authority to impose constraints on management's decisions to protect the company's interests and reduce potentially harmful decisions (Vafeas, 2000). Moreover, according to the Nasdaq rules, independent directors should constitute the majority of the BOD to eliminate the possibility of conflicts of interest. ...
How to cite this paper: Xanthopoulou, A., Skordoulis, M., Kalantonis, P., & Arsenos, P. (2024). Integrating corporate governance and forensic accounting: A sustainable corporate strategy against fraud [Special issue]. In the realm of financial oversight and corporate management, forensic accounting (FA) holds a critical position, serving as a central control mechanism and being widely recognized as an essential component of corporate governance. FA plays a crucial role as a central control mechanism and is acknowledged as a pivotal element of corporate governance. Consequently, it needs to continuously adapt in response to shifts in corporate governance practices, while the role of internal auditors transforms to actively support corporate sustainability. The aim of this research is to assess the effectiveness of FA and explore its relationship with corporate governance, based on the relevant literature. Thus, the main objectives of the present study are to identify the internal control attributes that influence the quality of its performance and to evaluate how corporate governance contributes to enhancing the quality of FA. To achieve the aim and the objectives of the paper, a literature analysis was carried out. The main contribution of the present paper is to refresh the existing body of knowledge on contemporary FA and its interplay with corporate governance. Authors' individual contribution: Conceptualization-A.X., M.S., P.K., and P.A.; Methodology-A.X. and P.K.; Resources-A.X. and P.A.; Writing-Original Draft-A.X. and M.S.; Writing-Review & Editing-A.X., M.S., P.K., and P.A.; Visualization-A.X. and M.S.; Supervision-P.K.; Project Administration-P.K. and P.A. Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
... Jaggi et al., (2009) established that where independent director's percentage is great in non-family owned firms efficiently checkmate management of earnings than in firms owned by family. In the same vein, A great number on board of directors that are independent are better efficient checker (Alves, 2014;Swai & Mbogela, 2016;Vafeas, 2000) so therefore increase earnings quality through decreasing the chances for EM as well as firm's insiders from committing frauds (Marra et al., 2011). Conversely, Mansor, Ahmad, Zaluki and Osman (2013) separated companies into family owned companies and firms of non-family ownership. ...
This study examines the relationship between board physiognomies and earnings management of banks in Nigeria for ten years period (2010-2019). Study's comprise of all the 14 deposit money banks listed on Nigerian Exchange Group as at December 31, 2019. All14 banks were used as sample by adopting census sampling technique. The technique of analysis employed was Multiple regression technique. Result of the analyses revealed that board control minimizes manager's tendencies to manage earnings while board independence increases earnings management. It is therefore concluded that board independence have the tendencies of perpetuating earnings management while board control reduces earnings management banks in Nigeria. It is thus recommended that the Central Bankof Nigeria (CBN) and Financial Reporting Council (FRC) should in their codes encourage ownership concentration investment because of the role they play in checkmating unwanted discretionary accruals in listed Nigerian deposit money banks
... Ahmed et al. (2006), outside directors are not associated with EM, while Dimitropoulos and Asteriou (2010) found a positive relationship between external directors and EI. Ahmed et al. (2006) and Vafeas (2000), there is a negative relationship between the BOD scale and EI. Elghuweel et al. (2017) found no evidence of an impact of BOD scale on EM. ...
... This finding indicates that a high proportion of independent directors may not increase bank performance. A negative relationship between PERIND and bank performance has been reported by several researchers (Beasley, 1996;Fosberg, 1989;Grace et al., 1995;Hermalin & Weisbach, 1991;Molz, 1988;Vafeas, 2000) (see Figure 4). These empirical findings support our hypothesis that board meetings play a vital role that is more proactive than reactive. ...
The purpose of this study is to examine the effect of corporate governance mechanisms on bank performance in general and the effect of board-constituted committees on bank performance in particular. Primarily, two questions are addressed in the context of the banking sector of India. First, does corporate governance mechanisms reduce the quantum of non-performing assets (NPAs)? Second, does the internal committee affect bank performance? Hence, this paper determines whether independent directors strengthen corporate boards and whether committees affect bank performance. The panel data ordinary least square regression analysis is used for this study. We also use logistic regression models for various committees to find their relationship with bank performance and NPAs. Tobin’s Q is used as proxy for bank performance. Independent variables are board size (BSIZE), proportion of independent directors on the board (PERIND), number of board meetings per year (BMEET), size of the audit committee (AUC), and two measures of the bank business (asset size and loan), and one control variable is time. We use financial and corporate governance data from 2005 to 2018, the study finds that independent directors play a major role on the board. It finds a positive and significant relationship between board independence and bank performance. The performance also increases with the increase in board size but after a point, the curve declines forming and an inverted U-shaped curve is formed. The mandatory internal committees have a crucial role to play, which is demonstrated by their effect on the reduction of NPAs. The significance of a well-functioning board and internal committees in discharging their fiduciary duties is highlighted in this study. An internal committee comprising a majority of independent directors is found to positively affect the performance of banks. They can help managers disburse good-quality loans and keep a check on risk-laden ventures.
... The total number of directors (executive and non-executive) who sit on the company's board is considered one of the most important features of board characteristics (Vafeas, 2000). The number of directors on a board of directors (Rachdi and Ameur, 2011) is an important aspect in influencing the board's effectiveness. ...
The fundamental goal of this article is to look into the link between board size, board tenure, and corporate risk management. amid the background of the modern portfolio theory. The study population consists of 328 companies listed on the Nigerian Stock Exchange as at December 2020. A sample of 30 firms was scientifically selected for the study. The analysis was carried out using dataset from 2014 to 2020, comprising of 210 observations. The panel data regression analysis is the technique for data analysis. The technique was chosen because of its ability to enhance data points while still controlling for individual variation. The research uncovers a positive and insignificant relationship between board size and corporate risk management. While board tenure had a positive and significant relationship on corporate risk management. Firm size, as a control variable, has a positive but insignificant connection with corporate risk management. In light of the findings of the study, we recommend that management work to strengthen the board of directors' traits in order to maximize the efficacy of their functions and to manage the risks involved to ensure more risk management that works and take advantage of the opportunities that arise.
... Moreover, given the size of the board, it could negatively affect the sense of responsibility of each director. In fact, Vafeas (2000) deduces that smaller boards are more efficient in supervising tasks compared to larger ones. Beasley (1996) concludes that the number of members on the board is positively associated with deceitful financial statements. ...
This research aims to predict the effectiveness of implementing International Financial Reporting Standards (IFRS) in reducing earnings management in Saudi Arabia (KSA). Considering that earnings management is influenced by various factors, we also propose examining the impact of corporate governance strength on enhancing the reliability of accounting information. Empirical results are obtained from a sample of 51 Saudi listed firms observed from 2014 to 2020. Discretionary accruals (DA) are utilized to identify earnings management, estimated using Dechow et al.'s (1995) model. Subsequently, a multivariate regression analysis is conducted to explore the relationship between DA, IFRS adoption, and corporate governance structure. The main findings indicate that the independence of both the boards of directors and the audit committee has a significant negative impact on earnings management in Saudi industrial companies. However, the size of the board, the size of the audit committee, and the frequency of audit committee meetings do not appear to have a significant effect on DA. Therefore, we suggest that certain mandatory measures should be implemented to enhance the effectiveness of corporate governance mechanisms in a developing economy like Saudi Arabia (KSA).
... Smaller groups tend to have more effective communication among members. Therefore, firms with smaller boards may have better monitoring capabilities, indirectly leading to improved tax planning by the management (Vafeas, 2000). Additionally, it has been suggested that larger board sizes are associated with a higher risk of financial statement fraud (Beasley, 1996;Pandya & Van Deventer, 2021). ...
A diversified board is increasingly essential for employee productivity and achievement. This study examines board diversity tax planning in Malaysian listed firms. The sample consists of 394 listed firms in Bursa Malaysia from 2014 to 2016. All the independent data, such as board gender, age, educational level, board size, board independence, and duality, are collected from annual reports. Effective tax rates (ETR), as a tax planning proxy, and control variables are collected from DataStream. The regression results show that board gender has a positive relationship with tax planning, while board independence has a negative one. Other independent variables such as age, educational level, board size, and duality have an insignificant relationship with tax planning. This study concludes that having females on the board encourages tax planning strategy within the firm and raises awareness towards minimising tax burdens. Less tax planning by independent directors could arise due to a lack of supervision and presence in deciding independent considerations in tax planning. The implementation of gender diversity in firms can affect tax management performance. For future research, this study recommends using actual data on tax planning expenditure that could give a more accurate effect of board diversity toward tax planning.
... Além disso, conselheiros independentes acompanham a qualidade das informações contidas nos relatórios financeiros e de RSC uma vez que os gestores podem, atendendo à interesses próprios, oferecer informações controversas aos stakeholders (Vafeas, 2000). Segundo o estudo de Fama & Jensen (1983), a tomada de decisão estratégica considera interesses organizacionais mais amplos quando há presença de diretores não executivos no conselho. ...
Our study investigates the impact of the board of directors’ attributes on companies’ environmental disclosure. The sample comprised 1,037 companies from Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States between 2015 and 2018. The results reveal that the percentage of independent auditors, board size, and the presence of the sustainability committee positively influence environmental disclosure. Our findings show that greater diversity on the board is an important factor for companies to disclose more information on their emissions. We conclude that companies should pay greater attention to the characteristics of their boards of directors, as this determines their engagement in environmental issues. This research presents an environmental disclosure index that is less susceptible to greenwashing. The results also bring contributions to the resource dependence theory and agency theory.
Keywords:
corporate governance; environmental disclosure; corporate social responsibility; liberal economies; board attributes
... In addition, independent directors monitor the quality of the information contained in financial and CSR reports since managers may have their own interests, generating controversial information for stakeholders (Vafeas, 2000). According to the study by Fama and Jensen (1983), strategic decision-making considers broader organizational interests when non-executive directors are on the board. ...
Our study investigates the impact of the board of directors’ attributes on companies’ environmental disclosure. The sample comprised 1,037 companies from Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States between 2015 and 2018. The results reveal that the percentage of independent auditors, board size, and the presence of the sustainability committee positively influence environmental disclosure. Our findings show that greater diversity on the board is an important factor for companies to disclose more information on their emissions. We conclude that companies should pay greater attention to the characteristics of their boards of directors, as this determines their engagement in environmental issues. This research presents an environmental disclosure index that is less susceptible to greenwashing. The results also bring contributions to the resource dependence theory and agency theory.
Keywords:
corporate governance; environmental disclosure; corporate social responsibility; liberal economies; board attributes
... Other studies state that smaller boards are the ones that provide effective managerial oversight because of lower coordination costs, better exchange of ideas, all members being participative and thus resulting in better quality information to outside investors (Bushman et al., 2004;Vafeas, 2000, Lipton & Lorsch, 1992Jensen, 1993;Botti et al., 2014). This could be explained by group dynamics on task efficiency where smaller groups tend to perform better on a given task than large groups. ...
The study sought to establish the influence of corporate governance on internet financial reporting in Malawi using the cross-sectional time horizon design. Sixteen companies listed under the Malawi Stock Exchange and forty registered limited companies that were operational but not on the Malawi Stock Exchange with a minimum of total assets of MWK 300,000,000.00 constituted the population. The sample was limited to 50 companies of which 43 had their financial reports available on the internet, which was the source of data. Content validity was achieved through consultation with experts in the field of accounting and financial reporting. Data was analyzed through multiple regression analysis using the SPSS Software. The study established that corporate governance mechanisms did not influence the timeliness of corporate Internet Financial Reporting. However, ownership structure positively influenced the corporation to engage in the Internet Financial Reporting. Furthermore, decision usefulness positively influenced the corporations to engage in the Internet Financial Reporting. Therefore, for the companies to engage in internet financial reporting, there is a need to ensure that decision usefulness is maximized. Furthermore, there is a need to ensure a maximized ownership structure for the organizations to keep engaging in the Internet Financial Reporting.
... Second, the Industry Model assumes an existence of a connection in non-discretionary accruals from different companies operating within the same industry and ignores the connected discretionary accruals (Dechow & Sloan, 1991). (2009)9), we excluded banks and insurance companies from the samples because these companies, according to Klein (2002) and Vafeas (2000) are specialized industries, under regulation of statutory bodies and have different structures of assets and liabilities. In addition, we deleted companies with incomplete data for the four years. ...
Earnings management has attracted considerable research efforts by various scholars across the domain of finance,
management and governance and investigating various jurisdictions. Studies have shown different characteristics of earnings
management by the companies listed on different stock exchanges with some exhibiting income-decreasing (downward earnings
management) while some have exhibited income-increasing (upward earnings management) behavior. This study examines the
extent and form of earnings management exhibited by companies listed on the Nigerian Stock Exchange. To investigate this,
panel data technique is used on a sample of 101 companies across all the sectors of the Nigerian economy, covering the period
2009-2012. The occurrence of earnings management is detected using the Modified Jones Model of detecting discretionary
accruals as a proxy for earnings management. The empirical results show that firms listed on the Nigerian Stock Exchange in
the aggregate over the four year period exhibit a downward earnings management.
Keywords: Earnings Management, Discretionary Accruals, Modified Jones Model, Nigerian Stock Exchange
... Earnings provide information, among other aspects, concerning executives' performance that is needed by most corporate governance mechanisms to effectively operate in addressing agency problems (Bushman & Smith, 2001;and Sloan, 2001). Previous studies have shown that the board of directors and its structure and composition, as well as that of its committees, affect the quality of earnings, indicating that effective audit committee practices benefit shareholders (Vafeas, 2000;Xie et al., 2003;Trapp, 2009). In addition, the efforts to grasp the function of the audit committee, an advisory body of the board of directors directly responsible for the supervision of accounting processes have also increased. ...
The study was conducted to examine the effects of audit committee activity on earnings quality with particular focus on the listed ICT firms in Nigeria. The secondary sources of data were employed and the panel data collected was analysed using multiple regression model. The findings revealed that the some of the variables of the audit committee activity have significant and positive association with earnings quality for the selected listed firms. The study recommends that the regulatory authorities like Nigerian stock exchange (NSE) and security and exchange commission (SEC) should consider encouraging ICT firms to have in addition to the three non-executive directors in their audit committee at least one independent director. This will further improve the financial reporting quality of ICT firms in Nigeria as revealed by this study, among others.
... (1) Board size Many authors such as Jensen (1993), Yermack (1996), Vafeas (2000), Abbott et al., (2006) argue that the board is too large to cause a reduction in accountability and does not exercise good control. Meanwhile, Beasley (1996) and Yermack (1996) point out that, the large-scale board is better able to control the actions of senior managers (Zahra & Pearce, 1989). ...
This study aims to overview the factors affecting the fraudulent behavior of financial statements of enterprises, on the basis of the Cressey (1953) Fraud Triangle Theory. Through the synthesis and analysis of data sources from predecessor studies, the article considers the impact of the following groups of factors: Motivation/pressure; Opportunity; and Attitude to influence fraudulent behavior on the financial statements of enterprises. The article contributes to providing a comprehensive review of academic research related to the factor groups: Motivation/pressure; Opportunity; and Attitude, thereby providing direction for future empirical research. At the same time, the study also elicits experience and implications for stakeholders in detecting, preventing and reducing fraudulent behavior on the financial statements of enterprises.
... If the company does not disclose the Chinese university the CEO attended, we assign a score of 1 Giannetti et al. (2015) EDU4 Score of the Chinese university from which the CEO obtained a bachelor's degree. Equals to EDU3, except for cases that we assign a score of 0 if the company does not disclose the Chinese university the CEO attended Giannetti formats (Vafeas, 2000;Peasnell et al., 2005;Firth et al., 2007). We excluded firms for which necessary data was not available. ...
Foreign experience is a mechanism through which personal cognitions can be shaped into idiosyncratic characteristics. Under the unique institutional background of China, the purpose of this paper is to examine whether CEOs’ foreign experience will affect the performance of CSR and whether the influences of CEOs’ foreign experience on CSR vary from the categories of foreign experience or from the governance environments. We find that firms with returnee CEOs show better CSR performance. Moreover, the longer the CEO’s foreign experience, the better is the CSR performance. Our results are robust to endogeneity concerns, inclusion of additional control, and alternative measures of key variables. Further analyses indicate that foreign working and integrated experiences have important impacts on CSR performance; and the positive effect of foreign experience on CSR is more pronounced for firms located in better legal environment and for those audited by reputable auditor. Our findings highlight foreign experience of CEO as an important driver of CSR performance.
... The few directors in a small board are preoccupied with the decision making process, leaving less time for monitoring activities. Vafeas (2000) reports that firms with the smallest boards (minimum of five board members) are better informed about the earnings of the firm and thus can be regarded as having better monitoring abilities. ...
The corporate collapses and failures experienced in the banking industry amid the organizational performance have been a major concern. The study aimed at ascertaining the performances of banks and determining the effect of board size, board composition and organizational performance of selected banks in Nigeria. The methodology adopted was combination of both descriptive design and ex-post facto research. A sample of 6 deposit money banks was purposively selected for a period of 6 years. The data were obtained from the annual reports of the selected deposit money banks. Both descriptive statistics and ratio analysis were used to analyze collated data. Hypotheses were tested by multiple regression and Pearson product moment correlation methods. The finding of the study revealed that there is a positive relationship between Board Composition with performance of selected Banks, while Board Size showed negative significant relationship with performance of selected Banks respectively. The study concluded with recommendations that Corporate Governance Mechanism and Code of Best practices contributed a good deal to the performance of Banks – that the managers of Selected Banks should adopt Corporate Governance principle and best practices as integral parts of managing banks for both effective and efficient service delivering, thus striking a balance between organization’s objective and the stakeholder’s interest.
... According to the agency theory, a relatively small board size could poster strategic investment decisions and perform its monitoring duties effectively, as large boards are characterised by communication and free-rider problems and, thus, dominated by self-interest behaviour. Vafeas (2000) argues that small boards are normally easier to coordinate, quicker in making decisions, less likely to have free-rider problems and less likely to oppose innovation. Empirically, some scholars find that firms with small IC size experience higher performance (Battaglia et al., 2014;Elamer and Benyazid, 2018). ...
This study empirically examines how the voluntary formation of a specialized
investment committee (IC), and IC characteristics affect financial distress risk (FDR), and whether such impact is influenced by the level of investment inefficiency. We use a large sample of Gulf Cooperation Council (GCC) nonfinancial companies during 2006-2016. A principal component analysis (PCA) is done to aggregate and derive a factor score for IC characteristics (i.e., independence, size, and meeting) as
a proxy for the effectiveness of IC. Our study also employs three measurements of financial distress risk to corroborate the findings and partitions sample firms into overinvesting and underinvesting companies to examine the potential impact of investment inefficiency on the IC-financial distress risk nexus. Using feasible generalized least square (FGLS) estimation method, we document that the likelihood of financial distress occurrence decreases for firms with separate ICs. We also find
that firms with effective ICs enjoy lower FDR. In other words, the probability of financial distress minimizes if the IC is large, meets frequently, and has a high number of independent directors. However, we find neither any moderation nor any mediation effect of investment inefficiency for the impact of IC and IC attributes on FDR. Our additional analysis indicates the expected benefits of an actively performing IC are amplified for firms with risk of both over- and underinvestment.
These findings are robust to alternative measures of FDR and investment inefficiency, sub-sample analysis and endogeneity concerns. The study, to the best of researchers’ knowledge, is the first to provide evidence in GCC firms’ perspective suggesting that the existence of an effective IC is associated with a lower risk of financial distress, and, to some extent, the economic benefits of IC are aggrandized for companies with a high probability of over- and underinvestment problems. These
results are unique and contribute to a small but growing body of literature documenting the need for effective ICs and their economic consequences on investment efficiency in the financial distress risk environment. Our findings carry valuable practical implications for regulatory bodies, policymakers, investors, and other interested parties in the GCC region.
... However, the code indicates between eight to sixteen members to be ideal for effective monitoring and control for the enhancement of corporate performance. According to Vafeas (2000), corporate bodies with smaller boards of a minimum of five members were better informed about the earnings of the companies and therefore regarded as having better monitoring abilities thereby enhancing their performance. Nomran and Haron (2019) argue that small board size is better for corporate entities as it provides better communication thereby enhancing the effectiveness of corporate bodies. ...
This study examines the effect of board size on credit risk with bank ownership, bank size and bank age acting as controls for the first time in the Ghanaian Banking Sector. Using Quantile Regression modelling, data was obtained from 12 universal Banks in Ghana over the period from 2011 to 2018 for the study. Agency theory was used since conflicts that exist between managers and shareholders need to be mitigated via the use of suitable corporate governance mechanism in the form of board size. The findings revealed that a universal bank with a small board size is not likely to reduce credit risk. Thus, the study established the importance of having large boards which are independent of management of universal banks in Ghana: large boards may enhance credit assessment and monitoring thereby reducing credit risk. The study used only quantitative techniques; however, using qualitative method in addition to the quantitative approach might enhance the understanding of the effect of board size on credit risk of universal banks in Ghana. Besides, the study relied on secondary data, though it is empirically established that there are biases inherent in such data.
... The few directors in a small board are preoccupied with the decision-making process, leaving less time for monitoring activities. Vafeas (2000) reported that firms with the smallest boards (minimum of five board members) are better informed about the earnings of the firm and thus can be regarded as having better monitoring abilities. Echoing the above findings, Mak and Yuanto (2003) reported that listed firm valuations of Singaporean and Malaysian firms are highest when the board consists of five members. ...
... Board size and EM relation also generated different results. Ahmed et al. (2006) and Vafeas (2000) believed that there is a negative relation between board size and EI. ...
This paper provides a comprehensive systematic literature review (SLR) of existing international accounting and finance research on the structure, characteristics, and diversity of corporate boards (SCDBs), as well as their effects on the corresponding corporate outcomes. Emphasis is particularly placed on synthesising and expanding current knowledge from both theoretical (i.e., economic and governance, regulatory, resource-oriented, and psychological/sociological) and empirical (i.e., multi-level antecedents of SCDBs and various themes of SCDB-related corporate outcomes) perspectives. Adopting the SLR method, we review 511 articles from 69 journals between the years 1973 and 2020. Our main findings are as follows. First, the majority of the papers in our SLR are descriptive in nature and/or use a single traditional theory (e.g., agency theory), rather than adopting an integrated multi-theoretical approach. Second, studies on the determinants or antecedents of SCDBs are scarce and have tended to focus on firm-and board-level issues rather than on institutional-and individual-level issues. Third, given the absence of crosscountry , mixed-methods, and qualitative investigations, current articles in our SLR suffer from methodological constraints, such as inconsistent definition and measurement, insufficient variables, and repetitive quantitative research methods. Finally, opportunities and a future research agenda are explored and outlined.
... Furthermore, the agency theory expects that boards will enhance the honesty of their financial reporting through scrutinised management since corporate boards are accountable for scrutinising management actions. Particularly those related to performance, financial disclosure, and responsibilities which delegated to sub-committees (Vafeas, 2000). Fama and Jensen (1983) stated that the board of directors will be able to reduce agency conflicts through using its power to scrutinise and control management based on the awareness that the managers may have personal preferences and these preferences may not always be in consistent with shareholders' expectations. ...
... On the other hand, other studies revealed that small boards' size enhances board effectiveness (Marashdeh, 2014;Bathula, 2008;Ozkan, 2007;Ranti, 2011). The authors argued that if a board size is small it helps to reach a unified decision on essential issues (Al-Ebel, 2013), enhances communication and coordination (Lipton & Lorsch, 1992;Abbott et al., 2004), provides quality information (Vafeas, 2000), and increases the disclosure levels (Al-Shaer et al., 2017). Wu (2003) and Pablo, Valentin, and Felix (2005) argued that smaller board size is more efficient to monitor the executive management and disseminate information to shareholders. ...
... In contrast, few studies suggest that the smaller board is less likely to have free riders and coordination problem (Dechow et al., 1996). According to Vafeas (2000), smaller board is more effective and informative in terms of earnings disclosure, which may reduce the earnings management. Similar results is explored by who described a positive association between larger board and earnings management. ...
The adoption of the international financial reporting standard (IFRS) has become an important research topic and received considerable attention from many empirical researchers worldwide. However, to the best of the authors’ knowledge, it’s one of the very few efforts to examine the relationship between IFRS adoption and real earnings management (REM) with the moderating role of board characteristics (board size, independence, expertise, CEO duality, and gender diversity). The study employs 94 firms listed on the Dhaka Stock Exchange (DSE) for six years, i.e., 564 firm year’s observations, over two time periods as pre (2004–06) and post (2013/14-15/16) adoption of IFRS. The underpinning theory of the study is agency theory, which explains the relationship among variables. To perform regression analysis on balanced panel data, STATA was used with PCSE estimators. The results show that IFRS has a significant negative relationship with REM. Board expertise and gender diversity have a significant negative relationship with REM, whereas CEO duality has a significant positive association with REM. Moreover, it is documented that board size and CEO duality have a significant negative moderating effect on the relationship between IFRS and REM. In contrast, board expertise, board independence, and gender diversity have significant positive moderation. It implies that a strong corporate governance mechanism may help to attain the objectives of IFRS adoption in Bangladesh. Thus, the findings of this study may persuade regulatory authorities in Bangladesh to make corporate governance compliance mandatory with punitive action, which would also act as a guideline for developing countries.
The thesis is about board independence mediate the relationship between accounting information and share price
Purpose: This study explores the role of corporate governance structure and corporate risk-taking of on Malaysian agriculture sector. Despite its importance in mitigating climate change, the agricultural sector also faces global competition, market liberalisation, rapid technological advances and the starter of stricter quality and safety procedures, all of w hich require f irms t o take g reater r isks. Design/methodology/approach: This study explores this relationship by applying generalised least square (GLS), random effect methodologies (REM). The sample of this study uses panel data from 2015 to 2021. Findings: The findings report a negative relationship between corporate governance structure and corporate risk-taking using a sample of firms from an emerging market. Research limitations/implications: The effects of these results for management practice and recommendations for further research were examined. The limitation of this study provides a sample of study using a limited number of agricultural firms in Malaysia. Originality/value: While this empirical study used a single industry-focused sample, most previous studies have focused on multiple industries. A key feature of this study is the analysis of how corporate governance structures affect the risk appetite of Malaysian agribusinesses.
Purpose
This study aims to analyze the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management after the issuance of the Palestinian Code on Corporate Governance in Palestine.
Design/methodology/approach
This study uses a panel data of 31 Palestinian listed companies from 2010 to 2016. It also uses structural equation modeling (SEM) model.
Findings
The results of the SEM model show a significant positive relationship of the existence of risk management and the tenure-chief executive officer (CEO) with financial performance. However, CEO duality has a significant negative relationship with financial performance. The results also show a significant positive relationship of CEO duality and board size with financial performance through the existence of risk management.
Research limitations/implications
This study adds to the existing literature by analyzing the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management in Palestine, one of the youngest stock exchanges in the region, which assists in testing the validity of agency theory in a young and small emerging Islamic market context.
Practical implications
The results of this paper are significant for shareholders and managers of companies to make proper choices to secure the interests of stakeholders and increase the flow of capital and foreign investment.
Originality/value
To the best of the author’s knowledge, it is one of the first papers to investigate the effect of the board of directors on financial performance, either directly or indirectly, through the existence of risk management in Palestine.
This paper aims to examine whether and to what extent corporate governance structures and mechanisms may have an impact on the effective tax burden of companies, as measured by the ETR (Effective Tax Rate). The sample consists of companies included in the high capitalization index of the Athens Stock Exchange over the period 2011 to 2021. The regression results indicate a negative association of the GAAP ETR with liquidity and a positive one with financial leverage, suggesting that a decrease in a firm's liquidity ratio is associated with a lower tax burden ratio, as opposed to a higher leverage ratio that increases GAAP ETR. Cash ETR shows a positive association with both financial leverage and firm size and a negative with CEO Duality. Larger firms in size appear to pay comparatively higher taxes while in contrast, the duality of roles (Chairman and CEO) seems to lead to lower tax payments. The results of this study are complementary to the existing literature, contributing to a better understanding of the relationship between corporate governance and corporate tax strategy. We expect that these new findings will be of interest to users of financial statements and in particular to tax, regulatory, and supervisory authorities.
The purpose of this research is to examine the relationship between the board of directors' values and the quality of information disclosure. This research is a correlational descriptive research, and it is applied in terms of its purpose, and in terms of the method of data collection, it is a non-interactive post-event type, which uses the data available in the database of the Tehran Stock Exchange and the new Rahavard software. has been The statistical population of this research is the companies accepted in the Tehran Stock Exchange, based on the conditions considered for the sample selection, 93 companies were selected and their information was collected using the method of systematic elimination during the years 1390 to 1395. Multiple regression for panel data has been tested through Eviuse software. The results indicated a negative and non-significant effect of the board of directors on the quality of disclosure and reliability. Also, along with the value board, the relationship between the board members' human capital with the components of education, expertise and professional experience (in the industry), the social capital of the board members with internal and external components with the quality of disclosure was tested. The results show that the level of education has a positive and significant relationship with the quality of disclosure and reliability, external social capital has a negative and significant relationship with the quality of disclosure, timeliness and reliability. No significant relationship was observed for other variables.
The study investigates the connection between Ghanaian microfinance institutions’ (MFIs’) performance and corporate governance practices using exploratory and descriptive statistics from eight (8) MFIs across Ghana. The study’s findings suggest a strong positive connection among the selected corporate governance mechanisms, namely ownership structure, independence of the audit committee, board diligence, independence of directors, financial expertise of directors, and performance. The study’s findings show that ownership structure followed by the financial expertise of directors is among the preferred corporate governance techniques that most significantly affect MFI performance in Ghana. Generally, the outcome of this study supports the idea that although corporate governance positively affects the performance of MFIs, the extent of that performance is stifled by challenges like a lack of transparency and a lack of independence of the audit unit. In light of this, the study recommends that MFIs take a keen interest in resolving such related challenges. Again, to strengthen the independence of audit units within MFIs, regulatory authorities should mandate the establishment of independent audit committees that will ensure objectivity and autonomy in the auditing process. Further, stringent financial reporting standards for MFIs, that aligns with international best practices should be enforced by regulatory authorities.The study’s conclusions have implications for MFI shareholders, managers, investors, and regulators in terms of policy.
This article explores the relationship between board quality and firm performance. The authors investigate any association between corporate governance and firm performance using a sample of listed firms on the Athens Stock Exchange (ATHEX) from 2008 to 2016 and two distinct performance models. This article expands on a previous study by Kalantonis et al. (2021) by including financial performance as assessed by both return on assets (ROA) and Tobin’s Q. This investigation provides a global and comprehensive view of how specific aspects of corporate governance (CG) have influenced Greek listed companies during the period 2008–2016. Extending analysis also allows to capture the dynamics of the Greek financial crisis as well as the recent legal institutional framework concerning CG. The authors found that firms with more independent board members performed poorly in terms of ROA, while board size (BS) is positively related to performance in terms of Tobin’s Q. Furthermore, a positive relationship was found between CEO duality (CEOD) and firm performance both in terms of ROA and Tobin’s Q, and no relationship was found between board gender diversification and firm performance. Finally, it was concluded that the investigated GC aspects affect more the firms’ performance than the firms’ earnings management.
This research explored the mitigating role of board size in the relationship between default risk and the Earning Response Coefficient (ERC). The study selected 250 non-financial companies listed on the Pakistan Stock Exchange (PSX) from the period between 2008 and 2015. The statistical result shows that all determinants (Growth, size, and Earning Persistence) are positively related to ERC except beta, which means that Beta is considered a partial measure of risk relevant to ERC. The relationship between Default Risk and ERC is negative and significant. As far as the mitigating role of board size is concerned, the result confirmed the hypothesis that board size plays a significant role in mitigating the negative relationship between default risk and earning Response coefficient (ERC). It also implies that a large board size ensures a better undertaking to monitor and control excessive debt obligations, which may protect the company from default risk and hence have a positive affect on ERC. This study has great contribution and importance for literature and society of emerging economies because it is investigated in emerging economy of Pakistan, while previous studies mostly conducted in developed economies
In this study, we investigate the impact of academic directors on a firm's performance and decisions in the Taiwan equity market. We find that firms with more independent directors and board size are more likely to appoint academic directors, and academic directors can improve firm performance. The presence of academic directors positively affects firm performance through channels like more capital expenditure and larger R&D expenses. Academic directors with finance and technology backgrounds positively correlate with both Tobin's Q and ROA. Moreover, the appropriate match of expertise between firms and their academic directors contributes to a better performance. However, corporations with academic directors have a higher compensation gap between top managers and employees.
Purpose
This study aims to investigate the effect of the board of directors on financial performance, either directly or indirectly through the existence of risk management after the issuance of the Palestinian Code on Corporate Governance (PCCG) in Palestine.
Design/methodology/approach
This study presents an empirical investigation of 31 nonfinancial Palestinian-listed companies from 2010 to 2016. This study utilizes the structural equation modeling (SEM) model.
Findings
The results of the SEM model find that there is a significant positive effect of the existence of risk management and the tenure-Chief Executive Officer (CEO) on financial performance. However, CEO duality has a significant negative effect on financial performance. The results also find that the effect of CEO duality and board size are significantly positive on financial performance through the existence of risk management.
Research limitations/implications
This study adds to the existing literature by investigating the effect of the board of directors on financial performance, either directly or indirectly through the existence of risk management in Palestine as one of the youngest stock exchanges in the region that assists in testing the validity of agency theory in a young and small emerging Islamic market context.
Practical implications
The results of this paper are significant to shareholders and managers of companies to make proper choices in order to secure the interests of stakeholders and increase the flow of capital and foreign investment.
Originality/value
To the best of the authors’ knowledge, it is one of the first papers to investigate the effect of the board of directors and financial performance, either directly or indirectly through the existence of risk management in Palestine.
Nepal Rastra Bank is the highest regulatory body in all financial-related activities in Nepal. Nepal has not a long history of Corporate Governance practices. Effective corporate governance reduces ownership and control problems and draws a clear line between the shareholder and the manager. One of its major objectives is to improve the overall corporate governance system of the financial institutions including commercial banks and create financial stability in the country. Especially for the Nepalese banking sector, corporate governance practices in the commercial bank of Nepal, relationships between board size and commercial bank effects in their performance, and the relationships between audit committee size and commercial bank performance in Nepal are the objectives of the article.
The objective of the present study is to examine the effect of board structure on human resource disclosure index (HRDI) in Indian listed companies. The present study is based on companies listed on NSE-200 Index. The final sample includes 126 companies for the period of ranging from F.Y. 2012–2013 to 2018–2019. The data of variables are collected from annual reports of the sample companies. In the analysis part, the descriptive statistics are used to check the level of human resource disclosures. After that, Pearson’s correlation matrix is applied for checking the correlation between board variables and HRDI. At last, to check the effect of board structure on HRDI, the one-way least square dummy variable (LSDV) regression model is applied. The outcomes of descriptive statistics show that the mean percentage of HRDI is 43.86. It lies on moderate side. Further, the outcomes of one-way LSDV regression model show that there is significant positive effect of board size, board meeting and audit committee on HRDI. In contrast, there is insignificant but positive effect of board independence, CEO duality on the level of human resource disclosure of the sample companies. Overall, it can be said that the human resource disclosure practice of the Indian companies is fairly good.
Purpose: This research aims to evaluate the impact of corporate governance on the quality of accounting information in listed companies on the Vietnamese stock exchange. Theoretical framework: Corporate governance focuses on the structure of ownership, the characteristics of director and supervisory boards. The quality of accounting information is evaluated under the perspectives of information users and information auditors. Design/methodology/approach: This research analyzes primary and secondary data from 193 listed companies as of 2021 and uses both qualitative and quantitative research methods. Findings: The results show that the factors affecting corporate governance that have a proportional impact on the quality of accounting information include: Government ownership, Supervisory Board ownership, major shareholders ownership, number of board members, professional qualifications of the association board of directors, and that have an inverse impact is the duality between the Board of directors and the managing directors, and that have no impact are the number of members in the supervisory Board and professional qualifications of the supervisory board. Research, Practical & Social implications: From the research results, the authors propose recommendations to improve the quality of accounting information through corporate governance. Originality/value: The value of the study is pointing out the impact of corporate governance on the quality of accounting information in listed companies on the Vietnamese stock exchange meaningful in creating trust among users to attract investment domestically and internationally.
This chapter aims to provide an overview and insight into the concepts, aspects, and issues of corporate governance in general and the internal mechanisms of the board of directors and ownership structure in particular. It begins by discussing the concept throughout the historical development of the theory of the firm and postulates different approaches to corporate governance. It is then followed by how the concept of corporate governance has emerged and how governance mechanisms have been used as ways to solve agency problems.
This study investigated board structure and financial reporting quality among quoted non-financial companies in Nigeria. The broad objective was to determine the relationship between, board independence, board expertise, board meetings and audit committee size and financial reporting quality among quoted companies in Nigeria. The study employed ex-post facto research design, covering a period of six years (2013 to 2018). The population size is one hundred and fourteen (114) non-financial companies in Nigeria, while fifty-nine (59) quoted companies constituted the sample size. Content analysis of financial statements of sampled companies were carried out and data were analysed using descriptive and inferential statistics, like correlation matrix and panel least square regression. The study found that board independence, board expertise and audit committee size have significant and positive relationship with financial reporting quality, which by implication, board independence, board expertise and audit committee size were critical factor enhancing financial reporting quality among quoted companies in Nigeria. The research also found board meetings to have negative relationship with financial reporting quality.The study recommended that board of companies should consists of more independence board members made up of male and female with professional financial expertise capable of enhancing financial reporting quality. Keywords: Board independence, Board expertise, Board meeting, Audit committee size, financial reporting quality, Panel Least Square Regression
The study's objective was to analyse the relationship between corporate governance attributes and financial reporting quality from a developing country perspective. Data was collected through quantitative content analysis of annual reports and audited financial statements (2012 to 2018) of Zambian-listed companies. This was a longitudinal study that involved panel data analysis. Therefore, a Hausman test was conducted to select the model to use. Panel regression analysis was used as a data analysis technique. Results show a statistically significant positive relationship between board size and financial reporting quality. A positive but statistically insignificant relationship existed between board accounting expertise, board gender diversity, audit committee independence and financial reporting quality. A negative but insignificant relationship existed between board independence and financial reporting quality. The corporate governance system alone cannot guarantee quality financial information by reporting entities. This could be related to the lack of an effective corporate governance system. Therefore, authorities must consider strengthening the regulatory enforcement mechanisms to ensure that companies achieve high financial reporting quality.
A internacionalização proporciona oportunidades e impõe desafios, se constituindo em estratégia à sobrevivência no mercado interno e à expansão para o exterior. Nesse sentido, o estudo identificou a influência da Qualidade do Conselho de Administração na internacionalização de companhias brasileiras com ações negociadas na B3 (Brasil, Bolsa, Balcão) no período de 2012-2016. Para tanto, elaborou-se uma métrica para mapear o Índice de Qualidade do Conselho de Administração e utilizou a metodologia da UNCTAD/ONU para medir a internacionalização das empresas. A amostra do estudo utilizou 85 empresas, distribuídas em 5 unidades de corte transversal, totalizando 425 observações em painel balanceado. Os dados foram coletados na plataforma Bloomberg® e Formulários de Referência. Utilizando-se inferência estatística em modelo de regressão MQO, os achados permitiram confirmar a hipótese de que quanto maior o índice de Qualidade do Conselho de Administração maior a internacionalização das empresas. As variáveis de controle número de países e tamanho, explicam a internacionalização, ratificando a relação esperada com base no referencial teórico. Por outro lado, as variáveis tempo, segmentos diferenciados de listagem na Bolsa de Valores e alavancagem não se mostraram estatisticamente significantes para explicar a internacionalização. Na medida em que sinaliza que a Qualidade do Conselho de Administração atrai novos aportes de recursos internos e externos, expandindo as fronteiras, o estudo também destaca a amplitude e a relevância das discussões dessa temática.
The aim of the present study is to highlight the framework of FA implementation to combat fraud risks and crimes and improve corporate governance’s effectiveness in fraud defense.
The characteristics of the board of directors and quality of financial information : an empirical study in Cameroonian context
The objective of this study is to examine the impact of characteristics of the board of directors on the quality of financial information. On the basis of statistical and econometric analyzes carried out on a sample of 300 large Cameroonian companies, there is a positive influence between the presence of a large percentage of independent directors in the board of directors and the quality of financial information. On the other hand, the size of the board of directors, the accumulation of management and chairmanship of the board of directors and the seniority of directors in the board of directors have a negative impact on the quality of financial information.
Ownership structure is very important because it is closely related to the operational control of the company. From the point of view of the theory of accounting, earnings management is determined by the motivation of the company manager. Different motivations will result in a different amount of earning management, such as the manager who also shareholders of the company with a manager who is not a shareholder and board composition also plays an important role in control of what is done by the executive or the board of directors as well as monitoring the effectiveness of the board of commissioners are affected by some degree of ownership concentration, and the relationship between managerial ownership with earnings quality is interaction by ownership concentration. This study aimed to determine the effect of managerial ownership on earnings quality, the proportion of independent directors on the quality of earnings, the interaction between managerial stock ownership by the controlling stake of the quality of earnings and the interaction between the proportion of independent directors with a controlling stake of the quality of earnings. The research sample using companies listed in Indonesia Stock Exchangein 2009-2011. “The technique of purposive sampling method. “These result indicate that managerial ownership has a negative effect on the quality of earnings, proportion of independent directors has a positive effect on the quality of earnings, the interaction between managerial stock ownership with no controlling shareholding positive effect on earnings and the quality of interaction between the proportion of independent directors with a controlling shareholding positive effect on earnings quality .
This study investigates managerial ability’s effect on firms’ earnings response coefficients (ERCs). We find that ERC increases with managerial ability, suggesting that investors more favorably perceive earnings from competent managers. Further, managerial ability influences ERC via the information environment; the influence is positive only for firms with better information environments. Meanwhile, since foreign investors have incentive to improve the information environment to overcome their informational asymmetry, the positive managerial ability-ERC association is more pronounced when firms have higher foreign ownership. These results indicate that managerial ability is an important determinant of ERC and that the information environment explains their relationship.
Across the world there have been important regulation related to the audit matters. Significant efforts have been made in recent years to improve the audit firm trustfully with a focus on the significance of corporate governance for the market perception of the audit firm quality. The IAASB published in 2020 the exposure draft on “Fraud and going concern in an audit of financial statements” and the Financial Reporting Council (FRC) and Institute of Chartered Accountants in England and Wales (ICAEW) updated in 2016 the Audit Firm Governance Code. Good corporate governance and the related effects on market reputation of audit firm could reduce the market concentration of the BIG4. This study looks at whether or not, and if so, in the UK market the corporate governance of the audit firms is correlated with the market share of audit firms in order to support the efforts of standard setters to improve the corporate governance of audit firms and to enrich the academic literature on this topic. Enhancing corporate governance practice in non BIG4 audit firm could affect the perception of audit quality of the smaller accounting firms and improve their market share.
Examining 128 tender offer bids made from 1980 through 1987, we categorize outside directors as either independent of or having some affiliation with managers, and find that bidding firms on which independent outside directors hold at least 50% of the seats have significantly higher announcement-date abnormal returns than other bidders. However, the relationship between bidding firms' abnormal stock returns and the proportion of board seats held by independent outside directors is nonlinear, suggesting it is possible to have too many independent outside directors. All results are lost if the traditional inside-outside board classification method is used.
Although Tobin's q is an attractive theoretical firm performance measure, its empirical construction is subject to considerable measurement error. In this paper we compare five estimators of q that range from a simple-to-construct estimator based on book-values to a relatively complex estimator based upon the methodology developed by Lindenberg and Ross (1981). We present comparisons of the means, medians and variances of the q estimates, and examine how robust sorting and regression results are to changes in the construction of q. We find that empirical results are sensitive to the method used to estimate Tobin's q. The simple-to-construct estimator produces empirical results that differ significantly from the alternative estimators. Among the other four estimators, one developed by Hall (1990) produces means that are higher and variances that are larger than the three alternative estimators, but does approximate those estimators in most of the empirical comparisons. Those three alternative q ratio estimators, furthermore, produce empirical results that are robust.
From 1986 to 1993, the United Shareholders Association (USA) provided a conduit through which small shareholders could unite and attempt to influence the governance of large US corporations. We show that the USA targeted large firms that underperformed the market, that its influence increased from 1990 to 1993, and that USA-Sponsored proposals were more successful when the target firm was a poor performer with high institutional ownership. The announcement of 53 USA-negotiated agreements is associated with an average abnormal return of 0.9% or a total shareholder wealth gain of $1.3 billion, suggesting that USA-sponsored shareholder activism enhanced shareholder value.
I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal.
Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
Conceptions of "teacher-as-researcher" or action research are examined in epistemological, professional, sociopolitical, and historical contexts. Using examples, the author presents six assumptions underlying action research: (a) teachers theorize and develop theories-in-practice, (b) action research involves more than technical problem solving, (c) a practitioner of any professional field and at any level can engage in action research, (d) research methods matter and are usually interpretive or qualitative, (e) action research can be collaborative, and (f) such inquiry can purposefully address social inequities and issues of power. Questions are raised that action research proponents themselves have not addressed to any great extent but which should be discussed by art educators who are interested in action research.
For 307 firms over the 1990–1994 period, I find that board meeting frequency is related to corporate governance and ownership characteristics in a manner that is consistent with contracting and agency theory. The annual number of board meetings is inversely related to firm value. This result is driven by increases in board activity following share price declines. I further find that operating performance improves following years of abnormal board activity. These improvements are most pronounced for firms with poor prior performance and firms not engaged in corporate control transactions. Overall, my results suggest that board activity, measured by board meeting frequency, is an important dimension of board operations.
This paper provides empirical evidence on the association between audit committee formation and the quality of accounting earnings. The audit committee is responsible for overseeing the financial reporting and auditing process of the firm. This paper assesses the effectiveness of the audit committee in discharging these responsibilities by comparing the quality, or informativeness, of earnings reports before and after audit committee formation. For this paper, informativeness is measured by the extent to which the market reacts to the release of earnings reports. Economic theory predicts that the magnitude of the market's reaction to earnings is a nondecreasing function of earnings quality. The results show a significant increase in the market's reaction to earnings reports subsequent to the formation of the audit committee. Specifically, the reaction to earnings reports is more than 20 percent greater after the formation of the committee than before. These findings are robust to alternative variations in the research design. Overall, the evidence is consistent with the audit committee providing meaningful oversight of the financial reporting and auditing process.
This study extends the growing literature on the deteminants of the variation in the relationship between unexpected earnings and abnormal security returns (the earnings response coefficient). We hypothesize that the firm's default risk as measured by financial leverage would affect the earnings response coefficient. We test this hypothesis by partitioning firms according to (1) the existence of debt in the capital structure (all-equity versus levered firms) and (2) the level of leverage (low-leverage versus high-leverage firms). The results are generally consistent with our hypothesis. Specifically, we find that the earnings response coefficients are larger for all-equity and low-leverage firms vis-à-vis matched-levered and high-leverage firms, even after controlling for the effects of equity beta, persistence, risk premium, and measurement error in unexpected earnings. Our findings are also robust with respect to the choice of earnings measure, either before or after interest charges.
We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards" with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board.
This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.
Valuation theory recognizes that the relation between earnings innovations and changes in security valuation is increasing in the persistence of the earnings innovations. Analyses in this article reveal that the present value of revisions in expected future benefits is a function of the length of revision horizon, suggesting that earnings persistence is determined, in part, by an entity's going-concern status. These analyses predict an inverse relation between earnings informativeness and an entity's probability of termination. Drawing on a sample of quarterly earnings and returns data from more than 1,500 distinct firms for the period 1981–1990, a statistically significant inverse relation is documented between an entity's probability of termination and the informativeness of earnings—the latter measured as the coefficient from a regression of returns on earnings. Further empirical analyses reveal that this result is a pervasive economic phenomenon not attributable to extreme conditions or other prevailing explanations of earnings informativeness. This inference is robust to variations in research design, including measurement of earnings informativeness and of termination probability and alternative specifications of the relation between returns and earnings. Consequently, the evidence in this article is consistent with a fundamental role for an entity's going-concern status in determining the usefulness of earnings.
This paper documents a strong positive relation between the percentage of outside directors and the frequency of outside CEO succession. The likelihood that an executive from outside the firm is appointed CEO increases monotonically with the percentage of outside directors. This monotonic relation is observed for both voluntary and forced departures. Evidence from stock returns around succession announcements indicates that, on average, shareholders benefit from outside appointments, but are harmed when an insider replaces a fired CEO.
Shareholder activists and regulators are pressuring U.S. firms to separate the titles of CEO and Chairman of the Board. They argue that separating the titles will reduce agency costs in corporations and improve performance. The existing empirical evidence appears to support this view. We argue that this separation has potential costs, as well as potential benefits. In contrast to most of the previous empirical work, our evidence suggests that the costs of separation are larger than the benefits for most large firms.
This article hypothesizes that the level of managerial ownership affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments. The hypothesis draws on the theory of the firm, and exploits: (1) separation of ownership from control of economic decisions, (2) the extent and consequences of accounting-based contractual constraints, and (3) managers' incentives in selecting and applying accounting techniques. Results show managerial ownership is positively associated with earnings' explanatory power for returns and inversely related to the magnitude of accounting accrual adjustments. Moreover, ownership is less important for regulated corporations, suggesting regulation monitors managers' accounting choices.
In the midst of a public policy debate on executive compensation, the US Securities and Exchange Commission (SEC) adopted a new compensation disclosure rule in 1992 (SEC, 1992b). Our study assesses changes in the structure of compensation committees that followed this rule, as well as changes in the relationship between Chief Executive Officer (CEO) pay and firm performance. The results suggest that, following the new rule, compensation committees include significantly fewer insiders, meet more frequently, and converge to a moderate size. Moreover, following the rule, accounting and market performance measures explain significantly more of the cross-sectional variation in CEO pay compared to the pre-rule period.
We examine the role of the target firm's independent outside directors during takeover attempts by tender offer. We find that when the target's board is independent, the initial tender offer premium, the bid premium revision, and the target shareholder gains over the entire tender offer period are higher, and that the presence of a poison pill and takeover resistance lead to greater premiums and shareholder gains. We conclude that independent outside directors enhance target shareholder gains from tender offers, and that boards with a majority of independent directors are more likely to use resistance strategies to enhance shareholder wealth.
This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.
This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
This study empirically tests the prediction that the inclusion of larger proportions of outside members on the board of directors significantly reduces the likelihood of financial statement fraud. Results from logit regression analysis of 75 fraud and 75 no-fraud firms indicate that no-fraud firms have boards with significantly higher percentages of outside members than fraud firms; however, the presence of an audit committee does not significantly affect the likelihood of financial statement fraud. Additionally, as outside director ownership in the firm and outside director tenure on the board increase, and as the number of outside directorships in other firms held by outside directors decreases, the likelihood of financial statement fraud decreases.
The authors investigate the role of outside directors in the corporate-control process by exploiting variation in ownership structure within the insurance industry. In mutuals, ownership rights are not transferable. This inalienability restricts the effectiveness of control mechanisms like external takeovers, thus increasing the importance of monitoring by outside directors. Consistent with this hypothesis, the authors find that mutuals employ more outside directors than stocks; firms that switch between stock and mutual characters make corresponding changes in board composition; mutuals' bylaws more frequently stipulate participation by outside directors; and mutuals with more outside directors make lower expenditures on salaries, wages, and rent. Copyright 1997 by University of Chicago Press.
This article demonstrates a linkage between firm performance and board composition by examining the committee structure of boards and the directors' roles within these committees. Consistent with previous studies, I find little association between firm performance and overall board composition. However, by going into the inner workings of the board via board committee composition, I am able to find significant ties between firm performance and how boards are structured. First, a positive relation is found between the percentage of inside directors on finance and investment committees and accounting and stock market performance measures. Next, firms significantly increasing inside director representation on these two committees experience significantly higher contemporaneous stock returns and return on investments than firms decreasing the percentage of inside directors on these committees. These findings are consistent with Fama and Jensen's assertion that inside directors provide valuable information to boards about the firms' long-term investment decisions. Copyright 1998 by the University of Chicago.
This paper examines firms' choice of the mix of mechanisms used to reduce agency problems between managers and shareholders. We empirically address two questions. First, is there interdependence between the use of the various "control mechanisms"? Second, does cross-sectional evidence suggest that firms fail to adjust their use of these control mechanisms optimally? We consider the use of seven control mechanisms in a sample of nearly 400 large U.S. firms. These mechanisms are: shareholdings of insiders, institutions, and large blockholders; use of outside directors; debt policy; the labor market for managers; and the market for corporate control. We present two main empirical findings. First, there is evidence of interdependence among the use of these mechanisms. Second, given this interdependence, cross-sectional OLS regressions of single mechanisms on firm performance can be misleading. Like prior studies, we find a positive effect of insider shareholding on firm performance when insider shareholding is examined alone. However, this effect disappears when all of the mechanisms are included in an OLS estimation and when the relation is estimated within a simultaneous equations framework. We also find a negative effect of a larger fraction of outside directors, greater debt, and more activity in the market for corporate control on firm performance in OLS estimations, but only the negative effect of board composition persists in the systems framework. The lack of a relation between insider shareholding and firm performance in the more inclusive estimations is consistent with the argument in Demsetz and Lehn (1985) that firms choose ownership structures optimally. By contrast, the persistent negative relation between board composition and firm performance suggests that boards contain too many outsiders.
There is an inherent conflict of interest between managers and shareholders when all or part of a public corporation is taken private and managers become major shareholders in the newly privatized firm. The role of outside directors who are independent of management is investigated to determine whether they ensure that shareholder interests are well-served. Our empirical investigation indicates that when the entire firm is taken private, abnormal returns for sellers are substantially higher for firms with boards that are dominated by independent outside directors than for firms that are not. In these transactions, the level of inside director ownership of shares is also significant in promoting shareholder wealth. For unit management buyouts, where the unit managers are seldom board members, board composition and inside director ownership appear to have no systematic effect on abnormal returns.
This paper examines the relationship between top management compensation and corporate performance in public utilities. Previous researchers have argued that incentives for profitability are not needed in public utilities, since regulation provides assured profits. Earlier empirical work supports this claim. We reexamine this issue and provide several methodological improvements over prior studies. Our findings are consistent with the hypothesis that compensation packages for senior managers in public utilities are constructed to provide them with incentives to maximize stockholders' wealth.
Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
This article, which is based on the author's Presidential address to the American Finance Association in 1993, argues that squeezing out excess capital and capacity is one of the most formidable ongoing challenges facing not only the U.S. economy, but the economies of all industrialized nations. In making this argument, the article draws striking parallels between the 19th-century industrial revolution and worldwide economic developments in the last three decades. In both periods, technological advances led to not only sharp increases in productivity and dramatic reductions in prices, but also massive obsolescence and overcapacity. And much as the great M&A wave of the 1890s reduced capacity by consolidating some 1,800 companies into roughly 150, the leveraged takeovers, LBOs, and other leveraged recapitalizations of the 1980s provided “healthy adjustments” to overcapacity that was building in many sectors of the U.S. economy.
To help public companies make the necessary adjustments to overcapacity, the author urges them to consider adopting some of the features of private equity, including significant equity stakes for managers, high leverage or payouts, and the recruiting of active investors as “partners in the business.”
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