Effects of Board of Directors' Characteristics on the
                    Quality of Accounting Information in Brazil

Holtz, Luciana; Sarlo Neto, Alfredo

doi:10.1590/1808-057x201412010

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Revista Contabilidade & Finanças

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Articles • Rev. contab. finanç. 25 (66) • Sept-Dec 2014 • https://doi.org/10.1590/1808-057x201412010 copy

Effects of Board of Directors' Characteristics on the Quality of Accounting Information in Brazil^* * Paper presented at the VII Anpcont Congress, Fortaleza, CE, Brazil, June 2013.

Authorship SCIMAGO INSTITUTIONS RANKINGS

One of the board of directors' responsibilities is to monitor the quality of information disclosed in financial reports. The board's structural and compositional characteristics can affect the quality of reported accounting information. The aim of this study was to investigate the effects of the board's structural and compositional characteristics on the quality of accounting information of companies listed on the Brazilian Securities, Commodities, and Futures Exchange (Bolsa de Mercadorias e Futuros - BM&FBovespa). Specifically, the characteristics studied were the size and independence of the board of directors and separation of the roles of chairman and executive director. Accounting information relevance and earnings informativeness were used as proxies for the quality of accounting information. The sample included non-financial companies listed on the BM&FBovespa with annual stock market liquidity higher than 0.001, covering the period from 2008–2011. Data were collected from the Economática® database and directly from companies' annual reports and reference forms available on the Securities Commission (Comissão de Valores Mobiliários - CVM) or BM&FBovespawebsites. Data analysis was undertaken using the multiple regression technique for calculating the models of accounting information relevance and earnings informativeness. The results reveal that, for companies that trade stocks on the BM&FBovespa in the Brazilian market, the characteristics of board independence and separation of the roles of chairman and executive director positively influence the quality of reported accounting information, specifically regarding the relevance of equity. Earnings informativeness is positively affected by board independence and negatively affected by larger board size (more than nine members). Overall, the results corroborate international studies such as those of Vafeas (2000)Vafeas, N. (2000). Board structure and the informativeness of earnings. Journal of Accounting and Public Policy, 19 (2), 139-160., Firth, Fung, and Rui (2007)Firth, M., Fung, P. M.Y., & Rui, O. M. (2007). Ownership, two-tier board structure, and the informativeness of earnings - evidence from China. Journal of Accounting and Public Policy, 26 (4), 463-496., Ahmed, Hossain, and Adams (2006)Ahmed, K., Hossain, M., & Adams, M. B. (2006). The effects of board composition and board size on the informativeness of annual accounting earnings. Corporate Governance, 14 (5), 418-431. and Dimitropoulos and Asteriou (2010)Dimitropoulos, P., & Asteriou, D. (2010). The effect of board composition on the informativeness and quality of annual earnings: empirical evidence from Greece. Research in International Business and Finance, 24 (2), 190-205., especially regarding board independence. The study showsthat stronger governance structures have a positive effect on the quality of reported accounting information.

Earnings informativeness; accounting information relevance; characteristics of the board of directors

Authors	Period	Country	Main results
Vafeas (2000)Vafeas, N. (2000). Board structure and the informativeness of earnings. Journal of Accounting and Public Policy, 19 (2), 139-160.	1990–1994	United States	The results show that the earnings of companies with smaller boards are perceived as more informative by market participants; however, no evidence is found that a larger proportion of independent directors increases earnings informativeness.
Xie, Davidson, and Dadalt (2003)Xie, B., Davidson, W. N., & Dadalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9 (3), 295-316.	1992, 1994, and 1996	United States	The authors' conclusion is that the financial expertise of members of boards and committees and the activities of these groups are important factors in limiting managers'results management.
Beekes, Pope, and Young (2004)Beekes, W., Pope, P., & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: evidence from the UK. Corporate Governance, 12 (1), 47-59.	1993–1995	United Kingdom	The results show that companies with a higher proportion of external directors are more likely to recognize bad news in the results in a timely manner. However, companies with boards with a relatively high proportion of external directors do not exhibit greater conservatism regarding the recognition of good news.
Ahmed, Hossain, and Adams (2006)Ahmed, K., Hossain, M., & Adams, M. B. (2006). The effects of board composition and board size on the informativeness of annual accounting earnings. Corporate Governance, 14 (5), 418-431.	1991–1997	New Zealand	The results show that earnings informativeness is negatively related to the size of the board.
Firth, Fung, and Rui (2007)Firth, M., Fung, P. M.Y., & Rui, O. M. (2007). Ownership, two-tier board structure, and the informativeness of earnings - evidence from China. Journal of Accounting and Public Policy, 26 (4), 463-496.	1998–2000	China	Empirical results find that companies with more independent directors that separate the roles of chairman and executive director have greater earnings informativeness.
Ahmed and Duellman (2007)Ahmed, A. S., & Duellman, S. (2007). Accounting conservatism and board of director characteristics: an empirical analysis. Journal of Accounting and Economics, 43 (2-3), 411-437.	1999–2001	United States	The results indicate that accounting conservatism is positively associated with the equity participation of independent directors and negatively associated with the percentage of insider directors.
Lara, Osma, and Penalva (2007)Lara, J. M. G., Osma, B. G., & Penalva, F. (2007). Board of directors' characteristics and conditional accounting conservatism: Spanish evidence. European Accounting Review, 16 (4), 727-755.	1997–2002	Spain	Empirical evidence indicates that companies in which the executive director has little influence on the functioning of the board have a higher degree of accounting conservatism.
Habib and Azim (2008)Habib, A., & Azim, I. (2008). Corporate governance and the value-relevance of accounting information: Evidence from Australia. Accounting Research Journal, 21 (2), 167-194.	2001–2003	Australia	The results indicate that companies with strong governance structures have greater accounting information relevance.
Marra, Mazzola, and Prencipe (2011)Marra A., Mazzola, P., & Prencipe, A. (2011). Board monitoring and earnings management pre- and post-IFRS. The International Journal of Accounting, 46 (2), 205-230.	2003–2006	Italy	The results suggest that independence of the board of directors and the existence of audit committees play important and effective roles in reducing earnings management after the adoption of the International Financial Reporting Standards (IFRS) in the country.
Dimitropoulos and Asteriou (2010)Dimitropoulos, P., & Asteriou, D. (2010). The effect of board composition on the informativeness and quality of annual earnings: empirical evidence from Greece. Research in International Business and Finance, 24 (2), 190-205.	2000–2004	Greece	The results demonstrate a positive relationship between accounting earnings informativeness and the percentage of independent directors but find no relationship with board size.
Alves (2011)Alves, S. M. G. (2011). The effect of the board structure on earnings management: evidence from Portugal. Journal of Financial Reporting & Accounting, 9 (2), 141-160.	2002–2007	Portugal	The results suggest that a smaller board composed mostly of non-executive directors improves the quality of accounting earnings by demonstrating a negative relationship with earnings management. There is evidence that a larger board has a positive relationship with earnings management.
Alkdai and Hanefah (2012)Alkdai, H. K. H., & Hanefah, M. M. (2012). Board of directors' characteristics and value relevance of accounting information in Malaysian shariah-compliant companies: a panel data analysis. Economics and Finance Review, 2 (6), 31-44.	2007–2009	Malaysia	The results do not identify relationships between the size and independence of the board of directors, the separation of roles, and the number of Muslim directors with accounting information relevance.
Abdoli and Royaee (2012)Abdoli, M. R., & Royaee, R. (2012). Board monitoring and earnings quality: an empirical study in Iran. African Journal of Business Management, 6 (11), 4179-4184.	2005–2010	Iran	The results indicate greater earnings informativeness in companies with a higher percentage of independent directors in which the chairman is also the executive director.

Variable	N° of obs.	Mean	Median	Standard Deviation	Minimum	Maximum
SR	678	0.1715	0.0425	0.6914	−1.3003	5.4115
P	678	1.2693	1.0787	0.8716	0.0007	7.2154
AE	678	0.0469	0.0619	0.18864	−1.2633	0.8048
SIZ	678	14.1930	14.2781	1.7987	10.2989	17.8499
IDB	678	0.6285	0.5815	0.3405	0.1345	2.2761
MTB	678	2.2061	1.4980	3.0916	−4.1724	15.5072
SB	678	7.436578	7	2.59723	3	17
IND	678	0.1869	0.1667	0.2012	0	0.8333

Variable	SR	P	AE	EQ	IDB	SIZ	MTB	IND	SB
AE	0.269^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.258^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
EQ	-	0.294^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.380^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
IDB	-	−0.035	−0.392^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	−0.502^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
SIZ	-	0.118^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.286^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.092^** Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	−0.407^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
MTB	-	0.158^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.047	−0.155^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	−0.100^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.302^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
IND	0.069^*** Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.062	0.052	0.061	−0.207^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.123^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.098^** Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	1.00
SB	0.000	−0.000	0.180^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.174^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	− 0.196^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.493^* Note: , , and ** represent significance levels of 1%, 5%, and 10%, respectively.	0.027	0.037	1.00

Stock price as dependent variable

Panel A: Variable statistics
	Model 1 – Hypothesis: 1a SC = SB		Model 2 – Hypothesis: 2a SC = IND		Model 3 – Hypothesis: 3a SC = CCEO
Variables	Coef.	RSE	Coef.	RSE	Coef.	RSE
Intercept	−0.300	0.333	−0.189	0.284	−0.17	0.296
AE	0.836	0.816	0.620	0.387	1.236**	0.514
EQ	0.486*	0.171	0.338*	0.076	0.309*	0.091
AE*SC	0.004	0.108	2.239	1.635	−0.560	0.531
EQ*SC	−0.007	0.019	0.578**	0.243	0.217**	0.091
IDB	0.758*	0.165	0.687*	0.157	0.745*	0.153
MTB	0.059*	0.018	0.059*	0.017	0.062*	0.017
SIZ	0.042***	0.022	0.036***	0.019	0.032	0.020
Panel B: Model statistics
R² Adjust.	19.84%		23.37%		21.08%
F stat.	15.36		18.74		15.75
Prob. F	0.000		0.000		0.000
N° Obs.	678		678		678

Abnormal return as dependent variable

Panel A: Variable statistics
	Model 1 – Hypothesis 1b SC = SB		Model 2 – Hypothesis 1b SC = SB1 and SB4		Model 3 – Hypothesis 1c SC = DIBGC
Variables	Coef.	RSE	Coef.	RSE	Coef.	RSE
Intercept	−0.495*	0.166	−0.476*	0.167	−0.482*	0.169
AE	2.885*	0.998	2.185*	0.565	1.988*	0.552
AE*SC	−0.108	0.079	-	-	0.126	0.269
AE*SC1	-	-	0.311	0.490	-	-
AE*SC4	-	-	− 0.887***	0.529	-	-
AE*NEG	−2.218*	0.761	−2.213*	0.763	−1.921*	0.621
Dummy Year	Yes		Yes		Yes
Dummy Sector	Yes		Yes		Yes
Panel B: Model statistics
R² Adjust.	22.53%		22.82%		22.09%
F stat.	5.06		5.06		5.17
Prob. F	0.000		0.000		0.000
N° Obs.	678		678		678

Abnormal return as dependent variable

Panel A: Variable statistics
	Model 1– Hypothesis 2a SC = IND		Model 2– Hypothesis 2a SC = DOM		Model 3 – Hypothesis 3a SC = CCEO
Variables	Coef.	RSE	Coef.	RSE	Coef.	RSE
Intercept	−0.456*	0. 165	−0.486*	0.166	−0.494*	0.166
AE	1.884*	0.594	2.037*	0.560	2.243*	0.716
AE*SC	1.767***	1.053	2.365***	1.322	−0.214	0.395
AE*NEG	−1.932*	0.634	−1.931*	0.627	−2.011*	0.668
Dummy year	Yes		Yes		Yes
Dummy sector	Yes		Yes		Yes
Panel B: Model statistics
R² Adjust.	22.72%		23.09%		22.15%
F stat.	5.46		5.44		5.20
Prob. F	0.000		0.000		0.000
N° Obs.	678		678		678

Hypothesis	Expected sign	Sign obtained	Statistically significant	Result
H1a	-	Mixed	No	Not confirmed
H1b	-	-	Only one specification	Partly confirmed
H1c	+	+	No	Not confirmed
H2a	+	+	Equity	Confirmed
H2b	+	+	Yes	Confirmed
H3a	+	Mixed (+ EQ and - AE)	Equity	Confirmed
H3b	+	-	No	Not confirmed

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
E-mail: recont@usp.br

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[TFN01t03] Note: *, **, and *** represent significance levels of 1%, 5%, and 10%, respectively.

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Effects of Board of Directors' Characteristics on the Quality of Accounting Information in Brazil* * Paper presented at the VII Anpcont Congress, Fortaleza, CE, Brazil, June 2013.

Effects of Board of Directors' Characteristics on the Quality of Accounting Information in Brazil^* * Paper presented at the VII Anpcont Congress, Fortaleza, CE, Brazil, June 2013.