Competence fnexpert indicator variable with the value

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Unformatted text preview: h the value of 1 if the committee is composed solely of independent non-executive directors. ACNMAN Percentage of independent non-executive directors who are not managers in other firms. ACOPTION Ratio of stock options that can be exercised in the next 60 days to the sum of options and stocks held by independent non-executive members. Competence FNEXPERT Indicator variable with the value of 1 if at least one member has financial expertise. Activity MANDATE Indicator variable with the value of 1 if the committee is responsible for the oversight of both the financial statements and the external audit. MEETINGS Indicator variable with the value of 1 if the number of committee meetings in 1996 is larger than 2. BOARD OF DIRECTORS BOARDSIZE Number of directors on the board. Independence BOARDIND Percentage of board members who are independent non-executive directors. CEOCHAIR Indicator variable with a value of 1 if the roles of chair and CEO are held by one person. NOMCOM Indicator variable with a value of 1 if the nominating committee is composed in majority of non-executive directors. Directors’ incentives NXOWN The cumulative percentage of shares held by non-executive directors. Competence NXTENURE Average years of board service of independent non-executive directors. NXDIRSHIP Average number of directorships held by independent non-executive directors in unaffiliated firms. CONTROL VARIABLES Incentives AGENCY Indicator variable with a value of 1 if the firm both has a bonus plan based on income and is in the highest decile of its industry for its debt ratio. IPO Indicator variable with a value of 1 if the firm had an IPO in 1996. Other Monitoring Mechanisms BIG6 Indicator variable with a value of 1 if the auditor is a BIG 6 auditor. BLOCK Cumulative percentage of outstanding common shares held by blockholders holding at least 5% of the firm’s shares and who are not affiliated with management. Other control variable LNSIZE Natural log of total assets 32 TABLE 2 Descriptive Statistics Variable Namea HIGH_POSb Mean Median FINANCIAL CARACTERISTICSa SIZE 94.30 42.84 Net Income 0.03 0.11 Op. Cash Flows -0.24 -0.13 TAC 0.27 0.23 DAC 0.32 0.29 AUDIT COMMITTEE ACIND 0.67 0.67 ACNMAN 0.33 0.33 ACOPTION 0.31 0.13 FNEXPERT 0.10 MANDATE 0.57 MEETINGS 1.47 1 BOARD OF DIRECTORS BOARDSIZE 6.06 6 BOARDIND 0.43 0.50 CEOCHAIR 0.76 NOMCOM 0.05 NXOWN 0.02 0.00 NXTENURE 4.34 3.07 NXDIRSHIP 0.79 0.53 CONTROL VARIABLES AGENCY 0.05 IPO 0.29 BIG6 0.82 BLOCK 0.12 0.07 LNSIZE 3.83 3.76 N 100 HIGH_NEGb LOWb Testc Mean Median Mean Median 216.81 -0.55 -0.12 -0.43 -0.38 33.28 -0.37 0.06 -0.35 -0.29 1583.8 0.00 0.07 -0.07 0.00 230.58 0.05 0.12 -0.07 0.00 49.21*** 14.20*** 278.6*** 395.2*** 0.69 0.28 0.40 0.18 0.82 1.58 0.67 0.33 0.26 1 0.85 0.51 0.28 0.26 0.93 2.30 1 0.50 0.17 2 23.83*** 30.31*** 6.97** 8.67*** 38.83*** 24.73*** 6.54 0.48 0.69 0.09 0.04 3.97 0.93 6 0.50 0.00 3.00 0.71 8.16 0.60 0.66 0.24 0.03 7.50 1.57 8 0.60 0.00 6.73 1.38 40.55*** 31.07*** 2.52 18.14*** 6.22** 51.46*** 27.40*** 0.11 0.27 0.87 0.14 3.68 100 0.16 3.50 0.04 0.02 0.94 0.19 5.55 100 0.19 5.44 4.61 29.02*** 6.72*** 17.46*** 51.25*** a Net Income is net income before extraordinary items. Op. Cash Flows is operating cash flows from the cash flows statement. TAC is the total accruals and DAC is the discretionary accruals calculated using the Jones cross-sectional model. All financial variables are scaled by total assets. The other variables are described in Table 1. b The sample consist of three categories of firms based on their level of discretionary accruals for the year 1996. HIGH_POS is the group of 100 firms with the highest positive accruals, HIGH_NEG is the group of 100 firms with the highest negative accruals, and LOW is the group of 100 firms with the accruals closest to 0. c Test statistic comparing the three groups: Kruskal-Wallis for the continuous variables and Chi Square for the dichotomous variables. ** significant at the 5% level *** significant at the 1% level 33 TABLE 3 Logistic Regression of Earnings management level on Governance Characteristics and Control Variables EARNMAN = β 0 + β1 ACIND + β 2 ACNMAN + β 3 ACOPTION + β 4 FNEXPERT + β 5 MANDATE + β 6 MEETINGS + β 7 ACIND * MEETINGS + β 8 BOARSIZE + β 9 BOARDIND + β10 CEOCHAIR + β11 NOMCOM + β12 NXOWN + β13 NXTENURE + β14 NXDIRSHIP + β15 AGENCY + β16 IPO + β17 BIG6 + β18 BLOCK + β19 LNSIZE Variable Namea,b Exp. Sign INTERCEPT ACIND ACNMAN ACOPTION FNEXPERT MANDATE MEETINGS ACIND*MEETINGS BOARDSIZE BOARDIND CEOCHAIR NOMCOM NXOWN NXTENURE NXDIRSHIP AGENCY IPO BIG6 BLOCK LNSIZE Pseudo R2 None + ? + - Model χ2 EARNMANP (POS_HIGH vs LOW) Parameter χ2 3.996 -0.094 -1.662 1.706 -1.288 -0.900 1.845 -2.733 -0.051 -0.792 0.133 0.713 5.020 -0.132 -0.428 0.379 2.406 0.186 -3.406 -0.302 8.96*** 0.03 5.34*** 5.48*** 0.06 1.62* 5.82** 6.84*** 0.16 0.38 0.09 1.07 2.03 4.04** 3.64** 0.17 7.46*** 0.06 4.34** 3.38* 61.1 115.4*** EARNMANN EARNMANH (NEG_HIGH vs LOW) (HIGH vs LOW) Parameter Parameter χ2 χ2 6.646 -0.129 -0.586 -0.617 -1.099 -1.840 0.492 -0.396 -0.267 -1.372 0.084 0.736 -3.952 -0.118 -0.240 0.884 2.200 0.277 -1.228 -0.315 21.28*** 0.05 0.70 0.36 3.33** 11.62*** 0.35 0.15 3.29** 0.99 0.03 0.95 1.07* 4.49** 1.63 0.70 6.56*** 0.14 0.72 3.33* 62.4 119.5*** 6.325 0.068 -1.248 0.361 -0.677 -1.454 1.266 -1.562 -0.142 -1.071 0.045 0.784 -0.212 -0.132 -0.310 0.853 2.240 0.126 -2.078 -0.335 30.31*** 0.02 4.65** 0.41 2.26 8.04*** 3.56** 3.57** 1.80 1.04 0.02 0.17 0.01 7.67*** 3.57* 1.14 8.87*** 0.04 2.97* 6.21*** 58.9 150.9*** a EARNMANP is an indicator variable with the value of one if the firm is in the HIGH_POS category and zero if it is in the LOW category; EARNMANN is an indicator variable with the value of one if the firm is in the HIGH_NEG category and zero if it is in the LOW category; EARNMANH is an indicator variable with the value of one if the firm is in the HIGH_POS or HIGH_NEG categories and zero otherwise. The other variables are described in Table 1. b Test statistics are one-tailed when the expected sign is positive or negative, and two-tailed otherwise. * significant at the 10% level. ** significant at the 5% level *** significant at the 1% level. 34 End notes 1 On the other hand, outside directorships held by a non-executive director reduce the time he or she can devote to the firm and reduce the board's governing effectiveness (Morck et al. 1988; Beasley 1996). Additional directorships may improve effectiveness up to a point but beyond that point, the board is penalized because of the time and effort absorbed by other directorships. 2 Firms with very large income or cash flows from operations have been shown to bias the estimation of discretionary accruals. For detecting outliers, we use three criteria: Cook’s distance, Studentized residuals and hat matrix. An observation is excluded from the sample as an outlier if it fails two out of these three tests. 3 The BRC does not suggest a minimum number of meetings. Menon and Williams (1994) suggest that an audit committee needs to hold a minimum of two meetings per year, while the Canadian Institute Chartered Accountants (1981) suggests that at least three meetings are required for the committee to perform its duties effectively. 4 We also test the effect of financial expertise with a less restrictive definition of expertise where, as recommended by the BRC, a chief executive officer or a former CEO also qualifies as a financial expert. The parameter (not reported in a table) is still not significant. 35...
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This document was uploaded on 11/27/2013.

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