The association between foreign directors and opportunistic financial reporting
-
Author(s)JungHwa SuhLink to ORCID Index: https://orcid.org/0000-0003-3307-1158
,
Ho-Young LeeLink to ORCID Index: https://orcid.org/0000-0003-4950-5838
,
Hansol LeeLink to ORCID Index: https://orcid.org/0000-0001-6776-410X
-
DOIhttp://dx.doi.org/10.21511/imfi.15(4).2018.08
-
Article InfoVolume 15 2018, Issue #4, pp. 98-112
- 3148 Views
-
204 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study examines the effect of foreign directors in the board of directors on the monitoring function by analyzing the association between foreign directors and opportunistic financial reporting. The authors address this question by examining the effect of the foreign directors in the board on firms’ discretionary accruals and book-tax difference. The researchers analyze by using Korean firm data for the years 2001–2014 as Korea is one of the few countries that nepotism is strong within the board, providing the ideal setting to analyze the effect of foreign directors on the monitoring function of the board. The authors find that foreign directors have a positive effect on the monitoring function of the board, as discretionary accruals and book-tax differences of firms with foreign directors are lower than those without foreign directors. Further, the researchers find that the positive effect of foreign directors on the monitoring function is more pronounced if foreign directors are independent directors or expertise in accounting or finance. Overall, the findings support the view that foreign directors in the board increase the board diversity, which increases the independence of the board and so the monitoring function.
- Keywords
-
JEL Classification (Paper profile tab)M480
-
References42
-
Tables10
-
Figures0
-
- Table 1. Sample composition by year and industry
- Table 2. Descriptive statistics
- Table 3. Correlation matrix
- Table 4. The effect of the foreign directors in the board of directors on the discretionary accruals
- Table 5. The effect of foreign directors on the board of directors on BTD
- Table 6. The effect of foreign independent director on the board on the discretionary accrual
- Table 7. The effect of foreign independent director on the board on BTD
- Table 8. The effect of foreign directors with expertise in accounting or finance on discretionary accruals
- Table 9. The effect of foreign directors with expertise in accounting or finance on BTD
- Table 1A. Definition of variables
-
- Adams, R., Hermalin, B., & Weisbach, M. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 48(1), 58-107.
- Anderson, R. C., Reeb, D. M., Upadhyay, A., & Zhao, W. (2011). The economics of director heterogeneity. Financial Management, 40(1), 5-38.
- Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 443-465.
- Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24.
- Bhagt, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14(3), 257-273.
- Black, J. S., Morrison, J., & Gregersen, H. B. (1999). Global explorers: The next generation of leaders. psychology press.
- Byoun, S., Chang, K., & Kim, Y. S. (2016). Does corporate board diversity affect corporate payout policy? Asia Pacific Journal of Financial Studies, 45(1), 48-101.
- Carpenter, M., Sanders, W., & Gregersen, H. (2001). Building human capital with organizational context: The impact of international assignment experience on multinational firm performance and CEO pay. Academy of Management Journal, 44(3), 493-511.
- Carter, D. A., Simkins, B. J., & Simpson, W. G. (2003). Corporate governance, board diversity, and firm value. Financial Review, 38(1), 33-53.
- Carter, D., Simkins, B., D’souza, F., & Simpson, W. (2008). The diversity of corporate board committees and financial performance (Working paper). Oklahoma state university.
- Chen, K. C., Chen, Z., & Wei, K. J. (2009). Legal protection of investors, Corporate governance, and the cost of equity capital. Journal of Corporate Finance, 15(3), 273- 289.
- Daily, C., Dalton, D. (1994). Corporate governance and the bankrupt firm: An empirical assessment. Strategic Management Journal, 15(8), 643-654.
- Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13(1), 1-36.
- Denis, D. K., & McConnell, J. J. (2003). International corporate governance. Journal of Financial and Quantitative Analysis, 38(01), 1-36.
- Desai, M., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179.
- Desai, M., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review of Economics and Statistics, 91(3), 537-546.
- Erhardt, N., Werbel, J., & Shrader, C. (2003). Board of director diversity and firm financial performance. Corporate Governance, 11(2), 102-111.
- Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law & Economics, 26(2), 301-325.
- Goodstein, J., & Boeker, W. (1991). Organizational performance and adaption: Effects of environment and performance on changes in board composition. Academy of Management Journal, 34(4), 805-826.
- Gwak, J. Y., Lee, Y. J., & Min, H. J. (2011). Determinants of the foreign-director appointment in Korean firms: a resource dependence approach. Korean Journal of International Trade and Industry Studies, 16(3), 79-107 [printed in Korean].
- Jensen, M., Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economies, 3(4), 305- 360.
- Jeon, K. G., Shin, Y. Z., & Kim, H. P. (2017). Board diversity and real earnings Management. Korean Accounting Journal, 26(3), 33-77 [printed in Korean].
- Jeon, K. G., Shin, Y. Z., & Kim, H. P. (2018). Foreign director on the board and investment efficiency. Korean Accounting Review, 43(1), 119-165 [printed in Korean].
- Johnson, M., Daily, C., & Ellstrand, A. (1996). Board of director: A review and research agenda. Journal of Management, 22(3), 409-438.
- Jones, J. (1991). Earnings management during import relief investigation. Journal of Accounting Research, 29, 193-228.
- Kang, J. Y., & Ko, J. K. (2014). Tax avoidance, firm value and corporate governance. Korean Accounting Review, 39(1), 147-183 [printed in Korean].
- Kim, M. T. (2004). A magnitude and direction of earnings management by foreign investors in Korea. Korean Accounting Information Review, 22, 88-111 [printed in Korean].
- Kothari, S. P., Leone, A., & Wasley, C. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197.
- Lee, H. I., & Moon, S. H. (2004). The effect of board and audit committee characteristics on the earnings quality and value relevance (Working Paper: Korean Accounting Association Conference: 421-464) [printed in Korean].
- Masulis, R., Wang, C., & Xie, F. (2012). Globalizing the boardroom – The effect of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53, 527-554.
- Milliken, F. J., & Martins, L. L. (1996). Searching for common threads: Understanding the multiple effects of diversity in organization groups. Academy of Management Review, 21(2), 402-433.
- Mills, L. M., Erickson, M., & Maydew, E. (1998). Investments in tax planning. The Journal of the American Taxation Association, 20(1), 1-20.
- Oxelheim, L., & Randoy,T. (2003). The impact of foreign board membership on firm value. Journal of Banking and Finance, 27(12): 2369-2392.
- Park, J. I., Jeon., K. A., Choi, J. H., & Park, C. W. (2009). The role of large auditors in restricting the earnings management by largest shareholders and foreign investors ownership. Korean Accounting Information Review, 27, 201-229 [printed in Korean].
- Rajgopal, S., Venkatachalam, M., & Jiambalvo, J. J. (1999). Is institutional ownership associated with earnings management and the extent to which stock prices reflect future earnings? (Working paper). University of Washington.
- Seo, Y. M., Goh, J. M., & Lee, H. Y. (2010). Association between outside directors’ characteristics and management compensation based on firm performance. Korean Academic Society of Accounting, 15(1), 1-31 [printed in Korean].
- Shin, I. H., Lee, M. G., & Lee, E. C. (2014). Market competition and real earnings management – Focusing on interaction with corporate governance. Korean Accounting Review, 39(3), 57-90 [printed in Korean].
- Shlefer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783.
- Song, D. S. (2014). The influence of outside director characteristics on the relation of earnings management to firm performance. Korean Business Education Review, 29(2), 109-131 [printed in Korean].
- Winfreid, R., Simon, P., & Sabina, T. (2007). Nationality and gender diversity on swiss corporate boards. Corporate Governance, 15(4), 546-557.
- Wilson, R. (2009). An examination of corporate tax shelter participants. The Accounting Review, 84(3), 969-999.
- Zahra, S., & Pearce, J. (1989). Board of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2), 201-244.
-
The relationship between corporate social responsibility and earnings management: accounting for endogeneity
Hyunjung Choi , Byungchul Choi ,
Jungyoon Byun
doi: http://dx.doi.org/10.21511/imfi.15(4).2018.06
Investment Management and Financial Innovations Volume 15, 2018 Issue #4 pp. 69-84 Views: 4587 Downloads: 537 TO CITE АНОТАЦІЯThis study examines the relationship between corporate social responsibility (CSR) and earnings management after controlling for endogeneity of CSR. Using a sample of non-financial firms listed on Korean Securities Market between 2002 and 2010, this study finds that ignoring endogeneity biases the estimated relation between CSR and earnings management. Specifically, the results show that the negative and significant relation between CSR commitment and discretionary accruals reported in the previous studies becomes insignificant. However, the negative and significant relation between CSR commitment and real activities manipulation remains significant even when the endogeneity of CSR commitment is taken into account. Therefore, this study provides evidence that proactive CSR engagement significantly affects firm’s practice of real activities manipulation, while it does not affect its practice of discretionary accruals. These results indicate that CSR commitment leads managers to be more responsible in management of operational activities than in accruals management.
-
Does board composition have an impact on CSR reporting?
Patrick Velte
doi: http://dx.doi.org/10.21511/ppm.15(2).2017.02
Problems and Perspectives in Management Volume 15, 2017 Issue #2 pp. 19-35 Views: 4455 Downloads: 1718 TO CITE АНОТАЦІЯCorporate social responsibility (CSR) reporting plays a key role in management control, particularly in light of the increased demand for non-financial reporting after the financial crisis of 2008–2009. This literature review evaluates 47 empirical studies that concentrate on the influence of several board composition variables on the quantity and quality of CSR reporting. The author briefly introduces the research framework that underpins current empirical studies in this field. This is followed by a discussion of the main variables of board composition: (1) committees (audit and CSR committees), (2) board independence, (3) board expertise, (4) CEO duality, (5) board diversity (gender and foreign diversity), (6) board activity, and (7) board size. The author, then, summarizes the key findings, discusses the limitations of the existing research and offers useful recommendations for researchers, firm practice and regulators.
-
Corporate governance and quality of financial statements: a study of listed Nigerian banks
Uwalomwa Uwuigbe ,
Eluyela Damilola Felix ,
Olubukola Ranti Uwuigbe ,
Obarakpo Teddy ,
Falola Irene
doi: http://dx.doi.org/10.21511/bbs.13(3).2018.02
Banks and Bank Systems Volume 13, 2018 Issue #3 pp. 12-23 Views: 1904 Downloads: 435 TO CITE АНОТАЦІЯThis study investigated the influence of Corporate governance on the timeliness of financial reports of listed banks in Nigeria. In order to provide answers to the research questions raised in this study, data were generated from the annual report of the listed banks on the Nigerian Stock Exchange considering the period 2008–2015. The study used Board size, Board Independence and Foreign Executives on the board as proxies for corporate governance. The data were analyzed using descriptive statistics, correlation matrix and panel data regression analysis. It was observed that board size had a non-significant negative relationship with the timeliness of financial reports. Also, the study observed that board independence also had a non-significant negative relationship with the timeliness of financial reports. Finally, it was observed that foreign executives on the board had a significant positive relationship with the timeliness of financial reports. The study thus recommends that the existing legal framework in Nigeria should be developed that clearly specifies the rights and obligations of a bank, its management and, of course, other stakeholders.
