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[Lecture] Monitoring Ability of Independent Directors

MAY . 31 2019
Title: Monitoring Ability of Independent Directors: The Effect of Commonality in Expertise on Financial Reporting Quality

Chen Chen, Monash Business School

Time: Friday, May 31, 10:00-11:30 a.m.

Venue: Room 217, Guanghua Building 2

Abstract: This paper finds that the ability of independent directors to monitor financial reporting quality depends on whether they have the expertise to match with that of executives. We find that higher commonality in expertise between the firm’s executives and independent directors is associated with a lower probability of meeting or beating analyst forecasts. Difference-in-difference analysis using independent director’s sudden death and retirement suggests that our findings are plausibly causal. The effect of commonality in expertise is stronger for directors with accounting and finance skills, business skills, and for directors whose roles are more important in monitoring financial reporting quality. It is also stronger for firms with higher monitoring needs, which enjoy the most benefit from improved monitoring ability. High commonality in expertise is also associated with high CEO turnover sensitivity to performance and lower excessive managerial compensation. On the whole, the evidence suggests that commonality in expertise is a measure of monitoring ability of independent directors.

Introduction: Chen Chen is associate professor in the Department of Accounting. His research interests are in the areas of financial reporting, auditing and corporate governance. He previously worked at the University of Auckland Business School after he obtained his Ph.D. from Chinese University of Hong Kong in 2011. His research has been published in numerous academic journals including The Accounting Review, Journal of Corporate Finance, Journal of Banking and Finance, and Journal of Business Ethics.
Source: Guanghua School of Management
Edited by: Huang Weijian