Do Outside Directors and Their Financial Expertise Matter in Earnings Quality?

Abstract

Using 2006 to 2008 data from all firms listed on Japanese stock exchanges, we examine the relationships among the presence of outside directors, their financial expertise, and their companies' earnings quality. Contrary to expectations, the multivariate regression analyses indicate no significant positive relationship among these components. Firms with lower-quality earnings tend to engage more outside directors than firms with higher-quality earnings. However, the longer the tenure that outside directors have with the firm, the higher earnings quality tends to be. Furthermore, additional tests indicate that the presence of inside directors and inside board auditors is positively associated with earnings quality, but the mere presence of outside
directors or outside board auditors is not associated with earnings quality.

Keywords: outside directors, financial expertise, corporate governance, board systems, earnings quality