Busy boards and accounting conservatism – an Australian perspective

Abstract

Purpose This paper aims to examine the association between busy directors on corporate boards and accounting conservatism. Design/methodology/approach The authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues. Findings The presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings. Practical implications This paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties. Originality/value This research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.

Does Audit Committee Busyness Affect Financial Restatement? Evidence from Audit Committee Share Ownership

“…Our descriptive statistics are consistent with those of Le et al. (2023), who report the average board composition for independence in ASX companies as 75.8%.…”

“…Our findings are consistent with those of Kiel and Nicholson (2006), who report that the average board size in ASX companies is 5.7 directors, with a range of three to 16 directors. Further, Le et al (2023) report that the average board size in ASX firms is 7.396 (median = 7), with the average number of independent board members being 4.713 directors (mean value of BODINDP = 72.7%). Our descriptive statistics are consistent with those of Le et al (2023), who report the average board composition for independence in ASX companies as 75.8%.…”

“…Further, Le et al (2023) report that the average board size in ASX firms is 7.396 (median = 7), with the average number of independent board members being 4.713 directors (mean value of BODINDP = 72.7%). Our descriptive statistics are consistent with those of Le et al (2023), who report the average board composition for independence in ASX companies as 75.8%.…”

A global review of the literature on and proxies of busy boards and audit committees

“…The “percentage of busy independent directors” is another popular proxy, measured as the ratio of numbers of independent directors who have three or more appointments in publicly listed firm over the number of independent directors within a firm each year (Elyasiani and Zhang, 2015; Ferris et al. , 2019; Le et al. , 2022).…”

Agency costs and conditional conservatism of public companies in the Brazilian electric industry

“…Although both conditional and unconditional conservatism result in undervaluation of net assets, unconditional conservatism may give rise to some agency problems if investment decisions are made based on profit effects (Le et al, 2023). Additionally, conditional conservatism represents a significant attribute of financial reporting, signifying the timelier recognition of losses than gains.…”