This study examines whether a board’s structure and composition are indicative of its monitoring effectiveness in terms of mitigating opportunistic management behavior. French companies may legally choose to operate with a board of directors (One-tier board) or a separate management board and supervisory board (Two-tier board). While the French Corporate Governance Code sets out uniform guidelines on board composition and activity regardless of a given board structure, respective directors face different challenges in establishing adequate management oversight.
Hence, externally prescribed board composition may have varying or unintended consequences. Further, both board structures have been attributed with different conceptual advantages that may influence their practical monitoring performance. Using the occurrence of earnings management as an indicator for poor management supervision, empirical results show that companies with two-tier boards are superior monitors.
More generally for France, I also find that independent boards are associated with less earnings management whereas busy boards are associated with more earnings management. I do not find a measurable impact of director financial expertise. Finally, mixed results are presented on the existence of a moderating effect of board structure on the relationship between board composition and earnings management.
Table of Contents
1 INTRODUCTION
2 LITERATURE REVIEW
2.1 AGENCY THEORY AND OPPORTUNISTIC MANAGEMENT BEHAVIOR
2.2 PRIOR RESEARCH ON EARNINGS MANAGEMENT
2.3 EARNINGS MANAGEMENT AND BOARD MONITORING
2.4 MONITORING IN ONE-TIER AND TWO-TIER BOARD STRUCTURES
2.4.1 Independence
2.4.2 Knowledge about operations
2.4.3 Access to information
2.4.4 Influence on outcomes
2.5 RESEARCH SETTING FRANCE
3 HYPOTHESES DEVELOPMENT
3.1 BOARD STRUCTURE
3.2 DIRECTOR INDEPENDENCE
3.3 DIRECTOR BUSYNESS
3.4 FINANCIAL EXPERTISE
3.5 THE MODERATING EFFECT OF BOARD STRUCTURE
3.5.1 Interaction between board structure and board busyness
3.5.2 Interaction between board structure and board independence
4 METHODOLOGY
4.1 SAMPLE SELECTION AND DATA SOURCES
4.2 MEASURING EARNINGS MANAGEMENT
4.2.1 Modified Jones Model (MJM)
4.2.2 Jones Working Capital Accruals Model (JWCA)
4.2.3 Jones cash flow model (JCF)
4.2.4 Abnormal working capital accruals (AWCA)
4.3 MEASURING BOARD MONITORING CHARACTERISTICS
4.3.1 Board structure
4.3.2 Independence
4.3.3 Busyness
4.3.4 Financial Expertise
4.4 CONTROL VARIABLES
4.5 MODEL SPECIFICATION
5 DATA ANALYSIS
5.1 DESCRIPTIVE STATISTICS AND CORRELATION
5.2 MULTIPLE LINEAR REGRESSION RESULTS
5.3 ROBUSTNESS ANALYSIS
5.4 LIMITATIONS
6 DISCUSSION & CONCLUSION
Research Objectives and Key Topics
This study investigates how board structure and specific director characteristics (independence, busyness, and financial expertise) influence monitoring effectiveness, using earnings management as a proxy for opportunistic management behavior within the unique French context of selectable one-tier and two-tier governance structures.
- Comparison of one-tier vs. two-tier board monitoring effectiveness.
- Impact of director independence on management oversight.
- Effects of director busyness on the quality of financial reporting.
- Role of director financial expertise in detecting earnings management.
- Moderating effect of board structure on the relationship between board characteristics and earnings management.
Excerpt from the Book
Monitoring in one-tier and two-tier board structures
Large, listed companies tend to have a dispersed ownership structure that prevents effective monitoring of management through a company’s shareholders. In response, two similar yet inherently different organizational systems have developed.
Within the Anglo-Saxon one-tier board system, the board of directors is a company’s central executive body tasked with both managing and monitoring on behalf of shareholders. Executing both these activities simultaneously is possible as there are two types of members, executive directors responsible for managing the company and (independent) non-executive directors responsible for monitoring management (Berger, 2004).
Organizational two-tier structures prescribe two separate executive bodies instead of a unitary board of directors – the management board tasked with the strategic and day-to-day management and the supervisory board tasked with the supervision of the management board on behalf of shareholders. While the executive body in one-tier systems is complemented with independent outside directors to monitor management on behalf of shareholders, two-tier systems facilitate shareholder monitoring through separate supervisory boards entirely made up of (independent) outside directors and other stakeholder representatives (Maassen, 2002).
Tirole (1986) incorporates this difference into agency theory by extending the principal/agent relationship to a principal/supervisor/agent relationship. He poses that principals may not have the time nor knowledge to sufficiently monitor the agent and therefore require a supervisor. The supervisor, in turn, does not have the knowledge or resources to replace the agent but gathers and reports information allowing the principal to control the agent (Tirole, 1986).
Summary of Chapters
1 INTRODUCTION: This chapter defines the agency problem, introduces the importance of board governance in mitigating earnings management, and outlines the study's scope regarding the French board structure options.
2 LITERATURE REVIEW: This section covers agency theory, prior research on earnings management, the role of boards, differences between one-tier and two-tier structures, and the French research setting.
3 HYPOTHESES DEVELOPMENT: This chapter synthesizes existing literature and French governance codes to propose six hypotheses regarding board structure and specific director attributes.
4 METHODOLOGY: This section details the sample selection of French companies, the construction of earnings management proxies, and the definition of independent and control variables for the regression models.
5 DATA ANALYSIS: This chapter presents the descriptive statistics, Pearson correlation results, and the multiple linear regression findings used to test the proposed hypotheses, including robustness checks.
6 DISCUSSION & CONCLUSION: This final section interprets the empirical results, discusses practical implications for French corporate governance, acknowledges study limitations, and suggests avenues for future research.
Keywords
Earnings management, Board of directors, Two-tier board structure, Board monitoring, Independence, Financial expertise, Busyness, France, Corporate governance, Agency theory, Abnormal accruals, Management oversight, Accountability, Board structure, Empirical analysis.
Frequently Asked Questions
What is the core focus of this research?
The work examines whether the structure (one-tier vs. two-tier) and composition of a board of directors are effective in mitigating opportunistic management behavior, specifically earnings management, within the French corporate sector.
What are the central thematic fields?
The study centers on corporate governance, agency theory, board effectiveness, and accounting quality, specifically investigating the impact of board independence, director busyness, and financial expertise on earnings manipulation.
What is the primary objective or research question?
The primary objective is to determine if two-tier board structures provide superior monitoring compared to one-tier boards and to analyze how specific board characteristics strengthen or weaken management oversight in France.
Which scientific methods are employed?
The research uses quantitative empirical analysis. It employs four distinct proxies for earnings management (MJM, JWCA, JCF, AWCA) and conducts multiple linear regression models on a dataset of French publicly listed companies over an 8-year period.
What is covered in the main section of the work?
The main sections include a theoretical literature review, the derivation of hypotheses regarding board attributes, a detailed methodological setup for measuring accrual-based earnings management, and an empirical analysis of regression outputs.
Which keywords characterize this work?
The study is characterized by terms such as Earnings management, Board of directors, Two-tier board structure, Board monitoring, Independence, Financial expertise, Busyness, and France.
How does the French corporate context differ from other countries?
France is unique because its commercial code allows companies to choose between a one-tier board structure and a two-tier structure, whereas most countries mandate one specific model.
What conclusion does the author reach regarding two-tier boards?
The empirical results suggest that companies with two-tier boards are generally associated with less earnings management, indicating they may be superior monitors, though this is dependent on the context and interaction with other board characteristics.
Does board busyness negatively impact monitoring?
Yes, the study finds consistent evidence that busier boards are associated with higher levels of earnings management, supporting the busyness hypothesis that overcommitted directors may be less effective monitors.
Did the study find that financial expertise improves monitoring?
Interestingly, no; the study did not find a statistically significant relationship between director financial expertise and a reduction in earnings management within the French context, which contradicts some international research.
- Quote paper
- David Port (Author), 2021, The Case of France. Board Structure, Board Characteristics and Monitoring Effectiveness, Munich, GRIN Verlag, https://www.grin.com/document/1119262
