Earnings quality and board structure:Evidence from south east asia

Abstract

Using a sample of listed firms in Southeast Asian countries, this paper examines the association among board structure and corporate ownership structure in affecting earnings quality. I find that the negative association between separation of control rights from cash flow rights and earnings quality varies systematically with board structure. I find that the negative association between separation of control rights from cash flow rights and earnings quality is less pronounced in firms with high equity ownership by outside directors. I also document that in firms with high separation of control rights from cash flow rights, those firms with higher proportion of outside directors on the board have higher earnings quality. Overall, my results suggest that outside directors’ equity ownership and board independence are associated with better financial reporting outcome, especially in firms with high expected agency costs arising from misalignment of control rights and cash flow rights.The econometric method employed is regressions of panel data. In a panel data setting, I address both cross-sectional and time-series dependence. Gow et al. (2010, The Accounting Review 85(2), 483–512) find that in the presence of both cross-sectional and time-series dependence, the two-way clustering method which allows for both cross-sectional and time-series dependence produces well-specified test statistics. Following Gow et al. (2010, The Accounting Review 85(2), 483–512), I employ the two-way clustering method where the standard errors are clustered by both firm and year in my regressions of panel data. Johnston and DiNardo (1997, Econometrics method. New York: Mc-Graw Hill) and Greene (2000, Econometrics analysis. Upper Saddle River: Prentice- Hall) are two econometric textbooks that contain a detailed discussion of the econometrics issues relating to panel data.