Board Composition and Accounting Conservatism: The Role of Business Experts, Support Specialist and Community Influentials

Abstract

In this study, we examine the relationship between accounting conservatism and board composition. We categorise outside directors according to their skills, abilities, connections and knowledge in three different categories: business experts, support specialists and community influentials. We address three main questions: Is the financial and accounting expertise of directors relevant to improving accounting conservatism? Does specialised expertise in the board affect the speed at which news is reflected in earnings? And how do the political ties of directors affect the sensitivity of earnings to bad news? Our sample consists of active US biotech firms publicly traded on the NYSE, AMEX and NASDAQ stock exchanges during the 2005–2013 period. Our study confirms that not all outside directors are equally effective in monitoring and contracting and that certain kinds of outside directors, such as politicians, can even lower the sensitivity of earnings to bad news. Our robustness analysis confirms that these results are not conditional on the accounting measure, and suggest that distinguishing directors according to their skills and abilities is crucial to understanding the way in which firm boards affect conservatism.

Board of Directors Attributes and Sustainability Performance in the Energy Industry

“…According to agency theory, the more diversity on the board, the better monitoring and management of the corporation's activities (Hassan and Marimuthu, 2016;Madhani, 2017). According to the resource dependency theory, diverse members bring more resources in terms of skills, expertise, advice, and counselling as well as access to the external market (Enache and Garcia-Meca, 2019;Fakir and Jusoh, 2020). Research showed that diversity in terms of gender, nationality, age, and higher education, improves corporate decision-making quality, especially as related to environmental and social activities, which leads to improving sustainability performance (Chams and Garcia-Blandon, 2019;Rao and Tilt, 2016b).…”

Director-Liability-Reduction Laws and Conditional Conservatism

“…However, they also do not consider firm officers to be independent. 5 Enache and Garcia-Meca (2018) find that politician directors are negatively associated with conservatism in their U.S. biotech sample, which suggests that independent directors vary in their influence on conservatism. 6 SOX requires public firms to disclose whether their audit committees include financial experts or not.…”

Board of Director Characteristics, Institutional Ownership, and Accounting Conservatism

“…Based on their capacity and expertise, the BoD substantially supervises preparing financial statements. BoD has the authority to determine performance targets, reported figures, and the timing of report submissions (Basu & Liang, 2019;Enache & García-Meca, 2019). In addition, the BoD with financial expertise can apply appropriate accounting standards, including accounting conservatism.…”

“…Several studies have examined the relationship between BoD characteristics and accounting conservatism. Nevertheless, previous empirical findings show heterogeneous and inconclusive results (Enache & García-Meca, 2019).…”