Accounting Conservatism and Banking Expertise of Boards of Directors

Tri Nguyen, Chau Duong, Nguyet Nguyen, Hung Bui

Research output: Contribution to journalArticleResearchpeer-review

Abstract

In this study, we examine the role of banking expertise on the board of directors on accounting conservatism. We provide an innovative way to measure banking expertise based on the working history in banks of all individual directors on the board. We argue that directors with banking expertise would have an information advantage about the market-level demand for accounting conservatism; hence, having them on the board can help non-financial firms avoid excessive conservatism. Moreover, directors with banking expertise often possess an interpersonal network in the banking industry that can act as a private communication channel in debt contracting, resulting in less demand for accounting conservatism at the firm-specific level. We find that accounting conservatism is negatively correlated with our measures of banking expertise on the board. The results are not affected by self-selection bias and are robust as we use different models. The evidence has some implications for boards of directors.
Original languageEnglish
JournalReview of Quantitative Finance and Accounting
DOIs
Publication statusPublished - 3 Nov 2019

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Banking
Accounting conservatism
Expertise
Board of directors
Communication channels
Conservatism
Self-selection bias
Debt contracting
Information advantage
Banking industry

Bibliographical note

This is a post-peer-review, pre-copyedit version of an article published in Review of Quantitative Finance and Accounting. The final authenticated version is available online at: http://dx.doi.org/10.1007/s11156-019-00851-2

Keywords

  • Accounting Conservatism
  • Banking Expertise
  • Boards of Directors

Cite this

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title = "Accounting Conservatism and Banking Expertise of Boards of Directors",
abstract = "In this study, we examine the role of banking expertise on the board of directors on accounting conservatism. We provide an innovative way to measure banking expertise based on the working history in banks of all individual directors on the board. We argue that directors with banking expertise would have an information advantage about the market-level demand for accounting conservatism; hence, having them on the board can help non-financial firms avoid excessive conservatism. Moreover, directors with banking expertise often possess an interpersonal network in the banking industry that can act as a private communication channel in debt contracting, resulting in less demand for accounting conservatism at the firm-specific level. We find that accounting conservatism is negatively correlated with our measures of banking expertise on the board. The results are not affected by self-selection bias and are robust as we use different models. The evidence has some implications for boards of directors.",
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Accounting Conservatism and Banking Expertise of Boards of Directors. / Nguyen, Tri; Duong, Chau; Nguyen, Nguyet; Bui, Hung.

In: Review of Quantitative Finance and Accounting, 03.11.2019.

Research output: Contribution to journalArticleResearchpeer-review

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AB - In this study, we examine the role of banking expertise on the board of directors on accounting conservatism. We provide an innovative way to measure banking expertise based on the working history in banks of all individual directors on the board. We argue that directors with banking expertise would have an information advantage about the market-level demand for accounting conservatism; hence, having them on the board can help non-financial firms avoid excessive conservatism. Moreover, directors with banking expertise often possess an interpersonal network in the banking industry that can act as a private communication channel in debt contracting, resulting in less demand for accounting conservatism at the firm-specific level. We find that accounting conservatism is negatively correlated with our measures of banking expertise on the board. The results are not affected by self-selection bias and are robust as we use different models. The evidence has some implications for boards of directors.

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