Directors with multiple directorships and accounting conservatism: Evidence from banks in South Asia

Shawgat Kutubi

doi:10.22495/cocv18i1siart13

Abstract

This study investigates the effect of directors with multiple directorships on banks’ financial reporting conservatism in South Asia (Bangladesh, India, Pakistan, and Sri Lanka). The paper applied Basu (1997) asymmetric timeliness measure of conditional conservatism for a sample of 93 banks stock listed banks of the four countries. We find that the relationship between directors with multiple directorships and accounting conservatism is an inverse ‘U’ shape. That is, at a low level of multiple directorships, banks follow conservatism in financial reporting (reputation effect), then at a high level of multiple directorships reporting conservatism declines (busyness effect). We also find an optimal level of multiple directorships at which directors influence the most on financial reporting conservatism. In further analysis, the study finds evidence that directors with multiple directorships (DWMDs) in banks with high insolvency risk follow accounting conservatism. The findings of this study remain robust when we modify the definition of multiple directorships and control for multiple directorships by bank chairs and insolvency risk under alternative settings

Highlights

In this paper, we examine the influence of directors with multiple directorships (DWMDs) on the reporting conservatism of banks
This study investigates the effect of directors with multiple directorships on banks‟ financial reporting conservatism in South Asia (Bangladesh, India, Pakistan, and Sri Lanka)
We examine the influence of directors with multiple directorships (DWMDs) on the reporting conservatism of banks

Summary

Introduction

We examine the influence of directors with multiple directorships (DWMDs) on the reporting conservatism of banks. As the directors hold additional directorships their ability to monitor managers increases since DWMDs is considered an expert and experienced director. Such directors can monitor the bank managers better in adopting conservative financial reporting. The director‟s ability to monitor managers declines since they become overboarded with too many directorships, and such directors monitor will have less influence over the bank managers in adopting conservative reporting. The DWMDs may have the incentive to be prudent in financial reporting or they may have less incentive to monitor the managers and banks might follow less conservative reporting

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Conclusion