Multi-board Directors, Board Reputation, and Financial Reporting Quality

Abstract:     
This study examines whether independent directors who sit on multiple boards affect monitoring as reflected in audit effort and financial statement reporting quality. A negative causal effect is expected if these directors are ineffective monitors because they are too busy or they cater to management, whereas a positive causal effect is expected if multi-board directors are more experienced and are subject to significant reputation penalties in the case of a financial reporting failure. An alternative explanation is that the presence of multi-board directors on the board does not affect financial reporting quality, but rather is a characteristic of the directorship market, where the equilibrium relation between the presence of multi-board directors and financial reporting quality is determined by the demand and supply for these directors. Using a new measure that captures the contribution of multi-board directors’ reputation to firms’ boards by summing the market capitalization of other firms on whose boards they serve as independent directors, and controlling for the endogeneity between multi-board directors’ appointments and reporting quality, we find that these directors have a positive causal effect on monitoring effort and outcomes.

Number of Pages in PDF File: 47

Keywords: Directors, Financial reporting quality, Monitoring, Multi-board directors, Reputation

JEL Classification: G34, M41, M51

working papers series