The effect of increases in board independence on financial reporting quality

Abstract

Purpose This paper aims to examine the relation between SEC regulations centered on board of director independence and financial reporting quality and investigates the different routes to board independence. Design/methodology/approach The sample includes 1,248 firm observations whose board composition is compared between 2001 and 2008. Each firm is categorized based on how they increase board independence. The authors test the hypotheses using ordinary least squares regression models. Findings Results show that firms choose between multiple routes when complying with the independence requirements, and how firms operationalize the SEC requirement impacts financial reporting quality. Specifically, firms that achieve increased board independence through increased board size are associated with higher financial reporting quality. However, there is no association between higher financial reporting quality and a subsequent increase in audit fees. Suggesting the reporting quality results from the board monitoring function and not from an increase in auditor effort. Originality/value No evidence exists on how a firm’s chosen route to increased board independence relates to financial reporting quality.