Strangers on the board: The impact of board internationalization on earnings management of Nordic firms. Issue 1 (February 2019)

• Record Type: Journal Article
• Authors: Hooghiemstra, Reggy; Hermes, Niels; Oxelheim, Lars; Randøy, Trond
• Is Part Of: International business review. Volume 28:Issue 1(2019:Feb.)
• Page Start: 119
• Page End: 134
• Publication Date: 2019-02
• Subjects: Foreign board members -- Board diversity -- Earnings management -- Agency theory -- Language -- Linguistic relativity -- Nordic countries; International business enterprises -- Periodicals; 338.8805
• DOI: 10.1016/j.ibusrev.2018.08.007
• Languages: English
• ISSNs: 0969-5931

Abstract

Highlights: The presence of non-Nordic foreign directors is associated with earnings management. Foreign board members' accounting knowledge negatively affects monitoring of boards. Language differences complicate communication in the boardroom. Different language structures affect perception and detection of earnings management. Abstract: The internationalization of firms has led to boards becoming more international as well. In this study, we investigate the consequences of board internationalization. In particular, by drawing on research on language and board dynamics, we identify theory-based reasons why board internationalization could increase, or decrease, earnings management practices. We use agency theory, stressing how board internationalization may positively or negatively affect monitoring quality of boards. Next to agency theory, we use theories explaining how language differences in the boardroom complicates communication and how differences in language structures (referred to as linguistic relativity in the literature) affect directors' perception and detection of earnings management practices. Using a sample of 3249 firm-year observations representing 586 non-financial listed Nordic firms during 2001–2008, we find that the presence of non-Nordic foreign directors on the board is associated with significantly higher levels of earnings management. Our analysis indicates that this effect is driven by language-related factors, as well as by the level of foreign board members' accounting knowledge.