Busyness of audit committee directors and quality of financial information in India

Abstract

Abstract:The audit committees, as a part of the internal corporate governance mechanisms, play an important role to enhance the financial reporting quality. The busyness of audit committee members of a firm in boards and committees of other firms can affect its independent functioning, ceteris paribus. The current study examines, first, the association between multiple directorships of audit committee members and quality of financial reporting in India, second, whether endogenously determined busyness limits of busyness of the audit committee members provide better insights than those exogenously mandated by regulators. The study finds that endogenously determined busyness limits of sub-samples and the full sample explain the association between multiple directorships of audit committee members and financial reporting quality in a better way than those stipulated by regulators. Further, a lower (higher) level of busyness of audit committee members enhances (deteriorates) financial reporting quality of firms.

Multiple directorships of corporate boards and firm performance in India

“…Dutta (1997) recommends to place a maximum limit on directors' busyness as many directors, who take up multiple directorships in other firms, may have the motivation to enhance their personal utility, for example, to earn extra income and develop their personal network in the market of corporate directors. Similarly, Jackling and Johl (2009) and Hundal (2016) find that increased busyness of board of directors in the Indian private firms results in the lower monitoring of managerial actions, which further results in poor firm performance and deterioration in the quality of financial reporting.…”

“…Second, by appointing those directors in the firm X, who although are not belonging to the same business group, however, belonging to firms having strong business linkages with the firm X. The high level of ownership concentration and promoters dominance pave the way for the phenomena of pyramiding and tunnelling 19 as well as earnings management (Mathew, 2007;Chakrabarti et al, 2008;Hundal, 2016).…”

“…A firm appointing board-level directors, who also serve on other corporate boards, adds to its resources in the form of both, human capital (education, experience, expertise, skills) and relational capital ( a network of ties to other firms, external environment and external contingencies). In the current paper, the combination of the human and relational capital of directors is defined as reputational capital (Hundal, 2016). Firms operating in a relatively uncertain business environment can be benefitted by recruiting those directors, who not only have a higher level of human capital but also a well-developed relational capital network with other organisations and external contingencies.…”

The Impact of Capital Structure on Firm Performance and Risk in Finland

“…Finally, the rising debt of a firm can lead to agency conflicts between shareholders and management. The corporate managers of a firm can launch an investment spree financed by substantial amount of borrowing and such move by the managers can help them to entrench themselves deeper in the corporate echelon to such an extent that they virtually become indispensable for the firm at the expense of shareholders (Hundal 2016;Hundal 2017).…”

“…First, the shareholders, particularly those having the long-term perspective, take an informed decision to remain with the firm by investing in firm equity, resultantly firm management gets extra freedom to reinvest the financial resources into new projects, which can enhance the firm value (Zickefoose 2014). Second, from the resource dependence theory viewpoint, the shareholders of a firm not only bring financial resources, but also their experience, managerial, and technical skills and relational capital, which can increase the credibility of the firm in the market (Hundal 2016;Hundal 2017).…”