Board Characteristics and Company Performance: A Case Study for the U.S.

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Board Characteristics and Company Performance: A Case Study for the U.S.

Journal Title: Journal of Economics, Finance and Management Studies - Year 2022, Vol 5, Issue 11

Abstract

This research aims to investigate corporate board structures and compositions, as well as their interrelationships. An empirical analysis on a sample consisting of 6,962 public traded U.S. corporations was conducted and the "isolation" consequences of board characteristics such as independence, financial expertise, and tenure on a company's earnings quality were examined. Furthermore, it was investigated whether and to what extent the tenure of outside directors influences the "isolation" effects of financial expertise and independence on earnings quality. The Modified Jones model was used to generate discretionary accruals, which were subsequently used to generate accrual-based earnings management. Firms with a more independent board and a higher proportion of outside directors with financial experience are found to have no effect on the degree of accrual-based earnings management. Outside directors' average tenure, on the other hand, has a negative and significant impact on earnings management. The study demonstrates that the average tenure of outside directors affects their independence as well as their financial expertise. Both have a statistically significant positive influence on accrual-based earnings management. This indicates that, even if outside directors are independent and there is at least one outside member with financial expertise on the board, the effectiveness of their monitoring decreases over time. In this study, the quality of earnings is examined using accrual-based earnings management models. The influence of these board qualities on real earnings management, however, has not been studied. As the usage of real earnings management has expanded in the post-SOX era, the utilization of these models is intriguing for future study pertaining to the effect of these characteristics. Furthermore, this study utilized and analyzed only a sample of large public U.S. enterprises, which are larger companies. Due to the SOX requirements to which these larger organizations are subject, this might contribute to a lack of diversity in the board makeup of these companies. This may have an effect on the regression findings by displaying low or non-significant effects. Future research may find it interesting to determine if there are differences between the effects of these governance qualities on earnings management for smaller and larger companies. Based on the findings, it is possible to conclude that when evaluating a firm's profits quality, it is critical to evaluate both the structure and makeup of the board, as well as the individual features of the outside members, such as their tenure. This study adds to the expanding corpus of research on the impact of board characteristics on corporate performance. It focuses on corporations situated in the United States, where corporate governance is a hotly debated topic, particularly after the enactment of SOX. It not only looks at the effect of these characteristics on earnings quality in "isolation", but it also responds to recent calls for researchers to look at the interaction of various board traits. It examines whether and to what extent outside directors' tenure influences the "isolation" consequences of financial expertise and independence on earnings management.

Authors and Affiliations

Roy te Riele, Georgios Georgakopoulos, Kanellos Toudas, Paraskevi Boufounou

Keywords

Board characteristics company performance corporate governance financial expertise independence on earnings management outside directors’ tenure

EP ID EP726541
DOI 10.47191/jefms/v5-i11-20
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