The association between foreign directors and opportunistic financial reporting

Abstract

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.

Board of Directors and Financial Restatement: Evidence from The Two-Tier System

“…Second, there is a possibility that foreign directors are in different locations and time zones, so they cannot perform functions effectively, allowing for higher reporting misstatements (Masulis et al, 2012). Third, the main objective of recruiting foreign directors is to develop business strategies for foreign markets so they are less involved in presenting financial reports (Suh et al, 2018). The findings support several other studies that report that foreign directors have no significant effect on financial restatements .…”

“…The different cultural characteristics and backgrounds may cause conflicts among board members (Suh et al, 2018). Second, there is a possibility that foreign directors are in different locations and time zones, so they cannot perform functions effectively, allowing for higher reporting misstatements (Masulis et al, 2012).…”

“…Nevertheless, other studies suggest that foreign board members tend to miss board meetings, making it difficult to make decisions. Their absence will increase the possibility of misstatement in financial statements (Dobija & Puławska, 2022;Masulis et al, 2012;Suh et al, 2018), such as earnings management activities (Hooghiemstra et al, 2019). Other studies fail to empirically prove foreign directors' influence on financial restatements .…”

Multinational Corporate Tax Avoidance in Indonesia

“…Iliev & Roth (2018), Sari (2019), andChen et al (2021) stated that there is a positive relationship between foreign directors and tax avoidance. Meanwhile, Suh et al (2018) and Wen et al (2020) state that there is a negative relationship between the presence of foreign directors and tax avoidance.…”