Do board of directors’ characteristics and executive remuneration impact financial reporting quality? A quantitative analysis of the Nordic manufacturing sector

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Abstract

The current paper aims to analyze the effects of corporate boards of directors’ characteristics, executive remuneration, and several corporate governance characteristics of the manufacturing firms in three Nordic nations (Finland, Sweden, and Denmark) on the quality of financial information, measured by total discretionary accruals (measured by both balance sheet, and cash flow method). The extant literature underpins that boards of directors’ characteristics, executive remuneration, and corporate governance characteristics do affect the quality of financial reporting. Nonetheless, there is a paucity of studies that theorize and explore linkages amongst the above-mentioned determinants to explore their effects on financial reporting quality. The current study uses discretionary accruals as the proxy of financial reporting quality. A higher (lower) level of total discretionary accruals implies a lower (higher) quality of financial reporting. The analysis has been performed based on firm-level unbalanced pooled secondary data of 88 publicly listed firms (698 firm-years) in the manufacturing sector in Finland, Sweden, and Denmark for the period 2013–2020. The results indicate that the ratio of performance remuneration to fixed remuneration of chief executive officers (CEOs) as well as that of executive board members, the experience of board members, and the number of directorship positions that are held by a firm’s board members in other firms (the phenomenon of multiple directorships) adversely affect the quality of financial data. However, the level of education of the board members, board size, and firm size favorably affects the financial reporting quality.

Keywords: Financial Reporting Quality, Corporate Governance, Earnings Management, Executive Remuneration, Discretionary Accruals, Jones Model

Authors’ individual contribution: Conceptualization — S.H.; Methodology — S.H., A.E., and M.T.; Formal Analysis — S.H., A.E., and M.T.; Investigation — S.H. and M.T.; Resources — S.H. and M.T.; Writing — Original Draft — S.H.; Writing — Review & Editing — S.H. and A.E.; Visualization — S.H.; Project Administration — S.H., A.E., and M.T.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G34, M41

Received: 30.08.2022
Accepted: 14.11.2022
Published online: 15.11.2022

How to cite this paper: Hundal, S., Eskola, A., & Troudi, M. (2022). Do board of directors’ characteristics and executive remuneration impact financial reporting quality? A quantitative analysis of the Nordic manufacturing sector. Corporate Ownership & Control, 20(1), 59–67. https://doi.org/10.22495/cocv20i1art5