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Strangers on the board : The impact of board internationalization on earnings management of Nordic firms

Hooghiemstra, Reggy; Hermes, Niels; Oxelheim, Lars LU and Randøy, Trond (2019) In International Business Review 28(1). p.119-134
Abstract

The internationalization of firms has led to boards becoming more international as well. In this study, we investigate the consequences of board internationalization. In particular, by drawing on research on language and board dynamics, we identify theory-based reasons why board internationalization could increase, or decrease, earnings management practices. We use agency theory, stressing how board internationalization may positively or negatively affect monitoring quality of boards. Next to agency theory, we use theories explaining how language differences in the boardroom complicates communication and how differences in language structures (referred to as linguistic relativity in the literature) affect directors’ perception and... (More)

The internationalization of firms has led to boards becoming more international as well. In this study, we investigate the consequences of board internationalization. In particular, by drawing on research on language and board dynamics, we identify theory-based reasons why board internationalization could increase, or decrease, earnings management practices. We use agency theory, stressing how board internationalization may positively or negatively affect monitoring quality of boards. Next to agency theory, we use theories explaining how language differences in the boardroom complicates communication and how differences in language structures (referred to as linguistic relativity in the literature) affect directors’ perception and detection of earnings management practices. Using a sample of 3249 firm-year observations representing 586 non-financial listed Nordic firms during 2001–2008, we find that the presence of non-Nordic foreign directors on the board is associated with significantly higher levels of earnings management. Our analysis indicates that this effect is driven by language-related factors, as well as by the level of foreign board members’ accounting knowledge.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Agency theory, Board diversity, Earnings management, Foreign board members, Language, Linguistic relativity, Nordic countries
in
International Business Review
volume
28
issue
1
pages
16 pages
publisher
Elsevier
external identifiers
  • scopus:85052248920
ISSN
0969-5931
DOI
10.1016/j.ibusrev.2018.08.007
language
English
LU publication?
yes
id
7fac7027-5c6b-439d-a36e-e9a56e0641e2
date added to LUP
2018-09-14 11:02:01
date last changed
2018-09-14 11:02:01
@article{7fac7027-5c6b-439d-a36e-e9a56e0641e2,
  abstract     = {<p>The internationalization of firms has led to boards becoming more international as well. In this study, we investigate the consequences of board internationalization. In particular, by drawing on research on language and board dynamics, we identify theory-based reasons why board internationalization could increase, or decrease, earnings management practices. We use agency theory, stressing how board internationalization may positively or negatively affect monitoring quality of boards. Next to agency theory, we use theories explaining how language differences in the boardroom complicates communication and how differences in language structures (referred to as linguistic relativity in the literature) affect directors’ perception and detection of earnings management practices. Using a sample of 3249 firm-year observations representing 586 non-financial listed Nordic firms during 2001–2008, we find that the presence of non-Nordic foreign directors on the board is associated with significantly higher levels of earnings management. Our analysis indicates that this effect is driven by language-related factors, as well as by the level of foreign board members’ accounting knowledge.</p>},
  author       = {Hooghiemstra, Reggy and Hermes, Niels and Oxelheim, Lars and Randøy, Trond},
  issn         = {0969-5931},
  keyword      = {Agency theory,Board diversity,Earnings management,Foreign board members,Language,Linguistic relativity,Nordic countries},
  language     = {eng},
  month        = {02},
  number       = {1},
  pages        = {119--134},
  publisher    = {Elsevier},
  series       = {International Business Review},
  title        = {Strangers on the board : The impact of board internationalization on earnings management of Nordic firms},
  url          = {http://dx.doi.org/10.1016/j.ibusrev.2018.08.007},
  volume       = {28},
  year         = {2019},
}