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Multiple directorships and earnings quality: Does investor protection matter?

Multiple directorships and earnings quality: Does investor protection matter? 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/approachThis 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.FindingsThis 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 implicationsThe appointment of directors should be based on market-based and not on a relationship (i.e. financial and industry professionals).Originality/valueThe 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

Multiple directorships and earnings quality: Does investor protection matter?

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1558-7894
DOI
10.1108/jabs-08-2019-0254
Publisher site
See Article on Publisher Site

Abstract

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/approachThis 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.FindingsThis 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 implicationsThe appointment of directors should be based on market-based and not on a relationship (i.e. financial and industry professionals).Originality/valueThe 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.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Aug 4, 2021

Keywords: Malaysia; GMM; Dynamic panel data; Earnings quality; Investor protection; Multiple directorships

References