Multiple directorships and earnings quality: Does investor protection matter?

Abstract

Purpose This study aims to investigate whether higher earnings quality is related to the existence of multiple directorships among corporate boards and whether this relationship varies with the quality of investor protection. Design/methodology/approach This paper used a dynamic panel data modelling on the sample of 2,090 firm-year observations over the period from 2007 to 2016 in Malaysia. The generalized method of moments estimators were used to deal with endogeneity and other econometric problems. Findings This study finds that the accumulation of several outside directorships is negatively associated with the firm's earnings quality, as measured by the magnitude of discretionary accruals. More importantly, the findings provide evidence that multiple directors are more efficient in improving earnings quality in healthy investor protection environment. Practical implications The appointment of directors should be based on market-based and not on a relationship (i.e. financial and industry professionals). Originality/value The results highlight the importance of interaction between internal and external governance mechanisms to improve the firm's financial performance, investment and market efficiency. High-quality investor protection and law enforcement are significant for enhancing the monitoring role of multiple directorships in improving earnings quality.

Do corporate governance practices restrain earnings management in banking industry? Lessons from India

“…Corporate governance ensures accountability of management towards stakeholders, whilst at the same time provides enough autonomy and stimulus to exploit wealth-generating opportunities (Epps and Ismail, 2009). Literature provides numerous pieces of evidence where corporate governance is effective in controlling earnings management (Xie et al , 2003; Cornett et al , 2009; Quttainah et al , 2013; Ben Othman and Mersni, 2015; Mersni and Othman, 2016; Essa et al , 2016; Kolsi and Grassa, 2017; Vasilakopoulos et al , 2018; Kapoor and Goel, 2019; Rajeevan and Ajward, 2020; Abd Alhadi et al , 2021; Chaity and Islam, 2021; Fan et al , 2021; Ghaleb et al , 2021). Earnings management in the banking industry is distinct from that of other sectors not just because of its reporting structure but also in terms of its unique corporate governance mechanism (Mehran and Lindsay, 2012), intense regulations, complex business structure (Andres and Vallelado, 2008), opacity Morgan (2002) and higher informational asymmetry (Leventis et al , 2013; Beatty and Liao, 2015).…”

Do multiple directorships stimulate or inhibit firm value? Evidence from an emerging economy

“…Following Ferris et al (2003), Latif et al (2020) and Abd Alhadi et al (2021), our independent variable is the number of directorships per director, calculated as the total number of other directorships divided by the total number of directors on the board. However, Sarkar and Sarkar (2009) argued that it is more accurate to employ the median than the average number of external directorships held by directors because it has the advantage of eliminating the extreme observations and reflecting the MDs of the majority of board members.…”

Earnings Quality: The Role of Owners

“…The background or position of shareholders ultimately has an impact on management decisions in management decisions. Some directors are more efficient in improving earnings quality in a healthy investor protection environment (Alhadi et al, 2021).…”