Are Busy Directors Related to Accounting Conservatism in the Banking Industry?

Shawgat Kutubi, Kamran Ahmed, Hayat Khan

Research output: Chapter in Book/Report/Conference proceedingConference Paper published in Proceedingspeer-review

Abstract

We extend the literature on busy directors’ (directors with multiple directorships) by examining their impact on accounting conservatism in the banking industry. We used two proxies to measure accounting conservatism in financial reporting: timely loan loss recognition and earnings conservatism. We hypothesize that busy directors have a non-linear relationship with accounting conservatism. Using timely loan loss recognition, we find evidence in favour of non-linear (a U-shaped) relationship between directors’ busyness and timely loan loss recognition and this is because the earnings management effect dominates prudence effect at low levels of busyness and vice versa at higher levels of busyness. However, using earnings conservatism, our findings reconcile the opposing views of the theory on this matter and indicate the existence of non-linear (an inverse U-shaped) relationship between busy directors and earnings conservatism and this is because the reputation effect (prudence effect) dominates the over-boarding effect (earnings management effect) at low levels of busyness and vice versa at higher levels of busyness. We conclude that accounting conservatism decreases (increases) with directors’ busyness up to a certain point and starts increases (decreases) as directors’ busyness crosses an optimal threshold while bank follows timely loan loss recognition and earnings conservatism respectively. Using two measure of accounting conservatism, our research shows a unique finding in bank earnings management literature which confirms that public equity banks follow earnings management and conservative reporting (prudence in reporting) simultaneously. Further, we conduct robustness test of our findings in terms of additional definition of busy directors, busy chairmen and insolvency risk of banks. Our findings are also robust to the inclusion of country-specific time effects and to alternative variants directors’ busyness.
Original languageEnglish
Title of host publicationFIRN Women ECR conference
Pages1-35
Number of pages35
Publication statusPublished - 10 Jul 2018

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