International Investor Protection Regime and the Effectiveness of Outside Directorship on the Board: An Empirical Essay

Abstract

We empirically identify exploratory evidence suggesting the potential for establishing an international corporate governance law protecting investors in relation to the outside directors on the board. Our conclusions are consistent with the principles proposed by OECD in 2004. Our study motivates by the institutionalizing aspects of laws pertaining to the governance of firms in international perspective. We obtain motivation from the published literature in accounting and finance domain to identify the answer to our research question. Existing evidence regarding whether outside directors on the board of directors can effectively constrain earnings management by firms leaves unaddressed the international context. We document international evidence that higher outside directorship on the board is associated with lower earnings management. We also find evidence that investor protection law does not affect the association between earnings management and board outside directorship. The results suggest that outside directors can play a similar role in monitoring the financial reporting process irrespective of whether they sit on the board in strong or weak investor protection law countries. Our findings support the internationalization of corporate regulations and practices on board governance as evinced in the OECD study.

Keywords: Investor Protection, Corporate Governance, Internationalization of Governance Regulations, Strong, and Weak Investor Protection Regime

JEL Classification: G21, G28, G32, G34, M41