The Effect of the Board Independence on a Manager’s Preliminary Earnings Announcements Decisions
Asian Tax Journal Vol. 15 No. 4 (2014), pp. 75-111
Abstract
This study examines whether the board independence measured by the percent of outside directorseffectively frustrates managers’opportunistic preliminary earnings announcements decisions. Inaddition, the study investigates if the monitoring system by outside directors against managerialopportunism functions effectively across the firm size. The outside director system aims to protect minority shareholders from managers and largeshareholders by including independent third parties as outside directors into board of directors(BoD). Therefore, the introduction of outside director system can secure the independence of BoDand improve corporate governance. However, there has been much criticism that in Korea outsidedirectors are not independent of managers and, moreover, they overlook and help managers’misconduct, far from monitoring and supervising their works. This study examines whether outside directors can mitigate managerial discretion in disclosingannual earnings. Using preliminary earnings as pure management representation, this study extendsprior studies in that it investigates whether outside directors’monitoring function differs acrossfirm size. The empirical results show that the percent of outside directors on the BoD is marginallysignificantly related with the accuracy of preliminary earnings. After separating the sample intotwo subsamples－large and small firms, the results report that the accuracy of preliminary earningsof small firms is enhanced by outside directors, however, that of large firms is not. This resultsuggests that managers in large firms exert their influence for friendly and dependent people to beappointed as outside directors, which results in frustrating the outside directors system. This study provides empirical evidence to the literature that has mixed results on the effects ofoutside directors system. The present outside directors system has positive consequences only ifthe firm size is relatively small. Also, this evidence suggests that the institutional problem withappointment should be remedied.
Keywords
- outside directors
- board independence
- preliminary earnings
- managerial opportunism
- disclosure behavior
Related Articles
Foreign Directors, Executive－Employee Pay Disparity, and Firm Performance
20(4) 187-212
Empirical Evidence on the Relation between Real Earnings Management and the Cost of Debt
16(5) 243-283
The Effect of Corporate Governance on Abnormal Audit Fees and Abnormal Audit Hours
12(1) 191-227
A Study on the Fulfillment of Company's Obligation on Preparing Financial Statements
11(4) 123-151
The Association between Earnings Transparency and Dividend Payout
27(2) 9-41