Posted Content•
An Empirical Analysis of the Relation between Board of Director Composition and Financial Statement Fraud
TL;DR: In this paper, the authors empirically tested the prediction that the inclusion of larger proportions of outside members on the board of directors significantly reduces the likelihood of financial statement fraud and found that no-fraud firms have boards with significantly higher percentages of outside board members than fraud firms.
Abstract: This study empirically tests the prediction that the inclusion of larger proportions of outside members on the board of directors significantly reduces the likelihood of financial statement fraud. Results from logit regression analysis of 75 fraud and 75 no-fraud firms indicate that no- fraud firms have boards with significantly higher percentages of outside members than fraud firms. Results are not sensitive to the definition of outside directors used, given that no-fraud firms have significantly higher percentages of both "grey" and "independent" directors than fraud firms. Interestingly, the presence of an audit committee does not significantly affect the likelihood of financial statement fraud. Additionally, as outside director ownership in the firm and outside director tenure on the board increase and as the number of outside directorships in other firms held by outside directors decreases, the likelihood of financial statement fraud decreases.
Citations
More filters
TL;DR: In this paper, the authors examined whether audit committee and board characteristics are related to earnings management by the firm and found a negative relation between audit committee independence and abnormal accruals.
3,298Â citations
TL;DR: This paper pointed out that the "quality" of earnings is a function of the firm's fundamental performance and suggested that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.
2,633Â citations
Cites background from "An Empirical Analysis of the Relati..."
...75 See Beasley (1996), along with Gaver and Paterson (2001), and Dechow et al....
[...]
...(1996) find that AAER firms are less likely to have an audit committee, but Beasley (1996) does not find a significant association....
[...]
...who also serves as chairman of the board or founder of the company and are less likely to have an outside blockholder than control firms (e.g., Dechow et al., 1996; Beasley, 1996; Farber, 2005)....
[...]
TL;DR: In this paper, the authors point out that the quality of earnings is a function of the firm's fundamental performance and suggest that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
2,140Â citations
TL;DR: In this paper, the role of publicly reported financial accounting information in the governance processes of corporations is reviewed and proposed additional research concerning the role and effect of financial accounting in corporate governance processes.
1,715Â citations
TL;DR: In this article, the authors examined the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process and found that fully independent audit committee are associated with a significantly lower cost of debt financing.
Abstract: Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.
1,419Â citations
References
More filters
TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
49,666Â citations
TL;DR: The authors argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. But they do not consider the role of decision agents in these organizations.
Abstract: ABSENT fiat, the form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs.1 Our goal is to explain the survival of organizations characterized by separation of "ownership" and "control"-a problem that has bothered students of corporations from Adam Smith to Berle and Means and Jensen and Meckling.2 In more precise language, we are concerned with the survival of organizations in which important decision agents do not bear a substantial share of the wealth effects of their decisions. We argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. We contend that separation of decision and risk-bearing functions survives in these organizations in part because of the benefits of specialization of
14,045Â citations
TL;DR: In this article, the authors explore a model in which the presence of a large minority shareholder provides a partial solution to the free-rider problem in a corporation with many small owners, where the corporation may not pay any one of them to monitor the performance of the management.
Abstract: In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
7,929Â citations
TL;DR: This article investigated the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, they found evidence of a significant nonmonotonic relationship.
7,523Â citations
TL;DR: The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit as mentioned in this paper, which is a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.
Abstract: Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.
7,121Â citations