BOARD CHARACTERISTICS AND FIRM PERFORMANCE: EMPIRICAL EVIDENCES FROM NIGERIA . A RESEARCH PROJECT MATERIAL ON ACCOUNTING
Published accounting information in financial statements are required to provide various users – shareholders, employees, suppliers, creditors, financial analysts, stockbrokers and government agencies – with timely and reliable information useful for making prudent, effective and efficient decisions. The widespread failure in the financial information quality has created the need to improve the financial information quality and to strengthen the control of managers by setting up good firms structures. A financial statement is said to be misleading if it lacks the qualities of accuracy, relevancy, comparability, reliability, compatibility and it contains fundamental errors or is prepared with the intention to deceive and/or confuse the users. This study examines the impact of firms’ characteristics from perspective of structure, monitoring and performance elements on the quality of financial reporting measured by modified model of Dechew and Dechev (2002) of quoted manufacturing firms in Nigeria. The study adopted correlation research design with pooled panel data and 24 are drawn out of 39 firms that served as population of the study. Multiple regression is used as a tool of analysis in examining the hypotheses of the study. The result reveals firm size, leverage, institutional shareholding and firm growth are significant and positively associated with the earning quality at 5% level of significance. This indicates that larger and more leveraged firms in Nigerian manufacturing sector are less likely to manage earnings and increase in sales as well as institutional investors serve as a monitoring tool of preventing managers from opportunistic behaviour in managing earnings. In addition, profitability and independent directors are positively associated with earnings quality while liquidity is inversely related with quality of financial reporting despite significant at 1% level of significance. In sum, firm characteristics of quoted manufacturing firms in Nigeria have impacted significantly on their financial reporting quality. Therefore, it is recommended among others that the shareholders of Nigerian quoted manufacturing firms should ensure all the seven firm characteristics used in this study keep on improving to decrease manipulative accounting in order to increase the quality of financial reporting.
1.1 BACKGROUND TO THE STUDY
The board of directors has long been recognized as an important corporate governance mechanism for aligning the interests of managers and all stakeholders to a firm. The need to adopt the right corporate governance mechanisms is driven by the agency problem and the associated free-rider problem that makes it difficult for any single investor or stakeholder to bear the cost of monitoring managers. The central role of board of directors in this process has therefore been recognized and in recent years has gained significant attraction for at least two reasons. Transition countries and other developing countries are struggling to attract resources for investment in an increasingly competitive global environment. Events at Enron and several other large corporations suggest the need for policies to promote board independence and other aspects of corporate governance. Levine (2004) also sees a link between corporate governance and the economy, arguing that it has the capacity to foster economic growth. According to him sound corporate governance makes it more likely for owners of capital to monitor the activities of managers either directly through voting on crucial matters or indirectly through the board of directors.
One key element of corporate governance is the role of board of directors in overseeing management. Managerial oversight is needed because managers have their own preferences and may not always act on behalf of the shareholders. Shirking, excessive perks, and non-optimal investments are examples of abusive actions by managers (Jensen and Meckling, 1976). The board of directors can reduce agency conflicts by exercising its power to monitor and control management (Fama and Jensen, 1983). Independent outside directors are presumed to carry out the monitoring function on behalf of shareholders to ensure that management is in place and to maximize shareholders’ interests because shareholders themselves would find it difficult to exercise control due to the wide dispersion of ownership of common stock (John and Senbet, 1998). A key contention is that outside board members should be independent of the executive management and free from any business or other relations with the company that could compromise their autonomy. Fama (1980) and Fama and Jensen (1983) argue that including outside directors as professional referees not only enhances the viability of the board but also reduces the probability of top management colluding to expropriate shareholder wealth. The generalization of this effective monitoring argument is that the more independent the outside directors serving on the board, the higher the firm performance.