Directors Skill and Financial Reporting Quality

57 Pages Posted: 16 Sep 2011 Last revised: 21 Jan 2014

See all articles by Amir Rubin

Amir Rubin

Simon Fraser University (SFU) - Beedie School of Business; Reichman University

Dan Segal

Reichman University

Date Written: October 20, 2013

Abstract

Motivated by theoretical models in economics which show that there is matching between CEO skill and firm size, we introduce a new measure of director skill which is based on the aggregate size of firms on which the director serves as an independent director. We validate our measure by showing that it is positively associated with director experience, financial expertise, industry expertise, and managerial experience. We then examine whether our average measure of skill across board members is positively associated with monitoring quality. Controlling for the endogenous relation between board composition and financial reporting quality, we find a positive association between our board measure for skill and monitoring quality, and we show that directors have a causal impact on monitoring effort and outcomes. Furthermore, consistent with the enhanced monitoring provided by skilled directors, we document a positive association between the level of and changes in our measure and firm value.

Keywords: Independent Directors; Financial Reporting Quality; Monitoring; Skill

JEL Classification: G34, M41

Suggested Citation

Rubin, Amir and Segal, Dan, Directors Skill and Financial Reporting Quality (October 20, 2013). Singapore Management University School of Accountancy Research Paper No. 2014-09, Available at SSRN: https://ssrn.com/abstract=1928384 or http://dx.doi.org/10.2139/ssrn.1928384

Amir Rubin

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Reichman University ( email )

P.O. Box 167
Herzliya, 4610101
Israel

Dan Segal (Contact Author)

Reichman University ( email )

P.O. Box 167
Herzliya, 4610101
Israel

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