Does Proximity to Corporate Headquarters Enhance Directors' Monitoring Effectiveness? A Look at Financial Reporting Quality

22 Pages Posted: 22 Mar 2019

See all articles by Maryam Firoozi

Maryam Firoozi

Carleton University - Eric Sprott School of Business

Michel Magnan

Concordia University - Department of Accountancy

Steve Fortin

University of Waterloo - School of Accounting and Finance

Date Written: March 2019

Abstract

Research question/issue. In this study, using a unique Canadian setting that relies on a principle‐based corporate oversight environment and that has access to a large pool of U.S. directors, we investigate how directors' proximity to a firm's headquarters influences its financial reporting quality.

Research findings/insights. Our results show that financial reporting quality is higher for firms whose boards (audit committees) consist of a greater proportion of independent directors who reside close to a firm's headquarters than for firms whose boards consist of directors who are more geographically dispersed. However, among nonlocal directors, the effect of nonlocal domestic directors on financial reporting quality is similar to the effect of local directors. In contrast, compared with local directors, the presence of U.S. directors has a negative impact on financial reporting quality.

Theoretical/academic implications. Our results suggest that directors' proximity to corporate headquarters extends beyond geographical proximity and also reflects directors' familiarity with a firm's institutional environment. Institutional familiarity helps domestic nonlocal directors reduce information costs associated with low geographical proximity, thus providing them with access to a wider range of information sources and enhancing their monitoring ability, at least for financial reporting. In contrast, foreign directors face information costs arising from both low geographical proximity and less familiarity with the institutional environment.

Practitioner/policy implications. Firms should take into consideration the consequences of nominating nonlocal directors on the monitoring of financial reporting quality. In addition, regulators should take a more comprehensive approach if they impose regulations such as board diversity initiatives, as regulatory pressures often imply appointing directors farther away from headquarters.

Keywords: corporate governance, board of directors, geographical proximity, financial reporting quality, foreign directors

Suggested Citation

Firoozi, Maryam and Magnan, Michel and Fortin, Steve, Does Proximity to Corporate Headquarters Enhance Directors' Monitoring Effectiveness? A Look at Financial Reporting Quality (March 2019). Corporate Governance: An International Review, Vol. 27, Issue 2, pp. 98-119, 2019, Available at SSRN: https://ssrn.com/abstract=3357824 or http://dx.doi.org/10.1111/corg.12264

Maryam Firoozi (Contact Author)

Carleton University - Eric Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Steve Fortin

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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