Institutional Investors on Boards and Audit Committees and Their Effects on Financial Reporting Quality

17 Pages Posted: 10 Jul 2014

See all articles by María Consuelo Pucheta‐Martínez

María Consuelo Pucheta‐Martínez

Jaume I University - Department of Finance and Accounting

Emma García‐Meca

Universidad Politécnica de Cartagena

Date Written: July 2014

Abstract

Manuscript Type. Empirical. Research Question/Issue. This study examines how the presence of representatives of institutional investors as directors on boards or on audit committees enhances financial reporting quality, reducing the probability that the firm receives qualified audit reports. We focus on directors who maintain business relations with the firm on whose board or committee they sit (pressure‐sensitive directors). We also investigate the specific role of bank directors and examine their effects on financial reporting quality when they act as shareholders and directors. Research Findings/Insights. Our results suggest that institutional directors are effective monitors, which leads to higher quality financial reporting and, therefore, a lower likelihood that the firm receives a qualified audit report. Consistent with the relevant role of business relations with the firm, we find that directors appointed to both boards and audit committees by pressure‐sensitive investors have a larger effect on financial reporting quality as it is more likely that the auditor issues an unqualified audit opinion. Nevertheless, when analyzed separately, only savings bank representatives on the board increase financial reporting quality. Theoretical/Academic Implications. The results confirm that board characteristics have an important influence on financial reporting quality, in line with the views that have been expressed by several international bodies. The findings also suggest that both researchers and policy makers should no longer consider institutional investors as a whole, given than directors appointed by different types of institutional investors have various implications on financial reporting quality, measured by the type of audit opinion. Practitioner/Policy Implications. This study makes its core contribution by empirically showing that directors appointed by different types of institutional investors have diverse implications on financial reporting quality. This evidence can be potentially helpful in providing a basis for regulatory actions, namely those aiming to influence the structure of the board of directors. The results have important implications for supervisors and regulators, who will benefit from an understanding of how the presence of directors on boards of savings and commercial banks in nonfinancial firms affects financial reporting quality in a bank‐based system.

Keywords: Corporate Governance, Audit Committee, Board of Directors, Institutional Investors, Financial Reporting Quality

Suggested Citation

Pucheta‐Martínez, María Consuelo and García-Meca, Emma, Institutional Investors on Boards and Audit Committees and Their Effects on Financial Reporting Quality (July 2014). Corporate Governance: An International Review, Vol. 22, Issue 4, pp. 347-363, 2014, Available at SSRN: https://ssrn.com/abstract=2464366 or http://dx.doi.org/10.1111/corg.12070

María Consuelo Pucheta‐Martínez (Contact Author)

Jaume I University - Department of Finance and Accounting

Campus del Riu Sec
12081 Castello de la Plana
Spain

Emma García-Meca

Universidad Politécnica de Cartagena ( email )

Departamento Economia Financiera y Contabilidad
Cartagena, Murcia 30201
Spain

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