Board capital and earnings quality with different controlling shareholders
ISSN: 1030-9616
Article publication date: 4 August 2020
Issue publication date: 10 September 2020
Abstract
Purpose
The purpose of this study is to examine the relationship between board capital and firm earnings quality with different controlling shareholders for a sample of 252 listed firms in Indonesia over the period 2011–2017.
Design/methodology/approach
This study uses a two-step dynamic generalized method of moments panel regression to estimate the board capital effect on earnings quality. The board capital measure is constructed from educational capital, networking capital and experience capital. Meanwhile, discretionary accrual is used as the proxy for earnings quality. All financial data is from the annual report. Board capital data is a combination of an annual report, RelSci data, Linkedin searching and Bloomberg data.
Findings
The findings of this study report that board capital has a significant effect on earnings quality. Higher board capital may result in better earnings quality. In further investigation, this study finds that firms with higher education backgrounds tend to have better earnings quality. Meanwhile, firms with higher experienced board members tend to have bad earnings quality. Additionally, networking capital does not have any impact on earnings quality. The findings of this study also document a strong size effect of controlling shareholders in moderating the relationship between board capital and earnings quality.
Research limitations/implications
This study contributes to upper-echelon, institutional, positive accounting and agency theory. It implies that agency cost plays an important role in that relationship. In a more deep analysis, this study records different board capital effects on earnings quality across controlling shareholders.
Practical implications
Shareholders should elect board directors following their competencies and should note that not all competencies will give a quality earning report. The educational background of board members will enhance earnings quality, but the experience of a board member will reduce the earnings quality. Further, the relationship between board capital and earnings quality is significantly moderated by controlling shareholders, implying that different controlling shareholders need different board capital.
Originality/value
This study examines board capital effects on earnings quality with different controlling shareholders using four major theories. The board capital measure is tedious and detailed allowing to capture the comprehensive human capital.
Keywords
Acknowledgements
The authors gratefully acknowledge the comments from editor and anonymous reviewers in improving this paper.
Citation
Kontesa, M., Lako, A. and Wendy, W. (2020), "Board capital and earnings quality with different controlling shareholders", Accounting Research Journal, Vol. 33 No. 4/5, pp. 593-613. https://doi.org/10.1108/ARJ-01-2020-0017
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited