The role of directors with multiple board seats and earnings quality: A Singapore context
| Date | 01 January 2021 |
| Author | Yeut Hong Tham,KhanLiang Dylan Chee |
| DOI | http://doi.org/10.1002/jcaf.22474 |
| Published date | 01 January 2021 |
J Corp Acct Fin. 2021;32:31–47. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals, Inc. 31
BLIND PEER REVIEW
The role of directors with multiple board seats and earnings
quality: A Singapore context
KhanLiang Dylan Chee | Yeut Hong Tham
School of Accounting, Curtin Business
School, Australia
Correspondence
Yeut Hong Tham, School of Accounting,
Curtin Business School, Australia.
Email: y.tham@curtin.edu.au
Abstract
This article explores whether multiple directorships has an influence on earn-
ings management for Singaporean publicly listed firms. This article attempts to
determine whether boards with multiple directorships are effective monitors
and able deterrents of earnings management activities. Drawing on resource
dependence theory, the results suggest that directors with multiple board seats
will be able to tap on external resources for information, skills, and financial
resources using their board connectedness. Data analysis is based on publicly
listed firms on Singapore Stock Exchange (SSE) with a final pooled sample of
1,404 firm-year observations from 2015 to 2018. Findings of this study show
that with a higher level of multiple directorships, there is a significant negative
relationship with the level of earnings management, where earnings manage-
ment is measured by Dechow et al. (The Accounting Review, 1995, 70, 193–
225) Modified Jones model and the Kothari et al. (Journal of Accounting and
Economics, 2005, 39, 163–197) performance-adjusted model. We also find that
firms in Singapore that have a higher number of multiple directorships on its
board, will have a lower level of tolerance on income-increasing earnings
manipulation. Notable secondary findings of this study include a significant
negative relationship between the proportion of female directors on the board
with the level of earnings management (income-increasing manipulations).
Additionally, it is found that the engagement of Big Four auditors has no sig-
nificant relationship with the level of earnings management in the context of
Singaporean firms. This study has significant implications and contributions to
the theoretical applications and policy reforms, specifically pertaining to the
Singapore Code of Corporate Governance on the issue of multiple
directorships.
KEYWORDS
earnings management, multiple directorships, resource dependency theory
1|INTRODUCTION
Multiple directorships and its influence have been stud-
ied extensively in countries like the United States,
Australia, India, Hong Kong and Middle Eastern
Countries (Brown, Dai, & Zur, 2019; Eulaiwi, Al-Hadi,
Taylor, Al-Yahyaee, & Evans, 2016; Kiel &
Nicholson, 2006; Sarkar & Sarkar, 2009; Tham, Sultana,
Singh, & Taplin, 2019). However, limited research have
been conducted in Singapore, especially on its impact
Received: 15 September 2020 Accepted: 4 October 2020
DOI: 10.1002/jcaf.22474
J Corp Acct Fin. 2020;1–17. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals LLC 1
CHEE THAM32
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
structure of the market. Firms with little available infor-
mation may experience higher costs of capital. The
impact of information in influencing the costs of capital
are indicated by several studies (Botosan, 1997;
Christensen, de la Rosa, & Feltham, 2010; Easley &
O'hara, 2004; Feltham, Robb, & Zhang, 2007; Huang
& Kang, 2018; Hughes, Liu, & Liu, 2007; Lambert,
Leuz, & Verrecchia, 2012; Perera & Nimal, 2017). For
instance, the rational expectations model explains the
relationship between private information and the costs of
capital. Besides, Ahn, Horenstein, and Wang (2018)
explain the effects of asymmetric information on the
asset equilibrium price.
Some researchers have shown the role of private
information in dictating the prices of assets. Bai, Bali,
and Wen (2019) for instance build on the classic analysis
of rational expectation to elucidate the role of asymmetric
information on asset value. They find that the presence
of agents in transactions affects the risk–return tradeoffs
thus affecting the portfolios held by the informed and
uninformed investors. Besides, Dow and Gorton (1995)
explains that informed investors may profit from their
information while the uninformed investors' loss due to
lack of information. The main set back of this setback is
that it does not consider the costs of capital in its
assumption.
Another set of literature considers the role of incom-
plete information and symmetric information. Particu-
larly, Amihud (2018) investigates the effects of capital
market equilibriums in situations where the agents lack
some information about certain assets in the market. In
this model, agents who have information on the existence
of certain assets may decide on the distribution of
returns. However, the information is incomplete because
not all agents have knowledge of such information. The
analysis by Amihud shows that the value of an organiza-
tion's assets may be lower due to the existence of incom-
plete information. However, in normal circumstances,
some investors may have more knowledge about returns
than others. Besides, all the investors know about the
existence of every asset in the market through the infor-
mation that may be asymmetric.
Lastly, information disclosure by a firm may affect
the costs of capital because disclosure of private informa-
tion turns it into public information (Deno, Loy, &
Homburg, 2019). The presence of public information
means that each investor has access to information
regarding investments. Since the process of producing
information is costly, individuals ought to spend consid-
erable resources to collect information. Public informa-
tion increases the value of assets and capital since the
information lowers the risks of uninformed investors to
hold assets (Gârleanu & Pedersen, 2018). Diamond and
Verrecchia (1991) state that disclosure of information can
either improve or worsen liquidity depending on the
decisions by holders of information. The accessibility of
public information affects the riskiness or profitability of
an investment. Other researchers such as Kandelousi,
Alifiah, and Karimiyan (2016) incorporate other impor-
tant elements of information sharing such as insiders and
strategic disclosure issues.
2.2 |Cost of capital
The cost of capital is the amount expected by investors
after they have offered the capital required by a business.
Mostly, the sources of capital in a firm comprises of
investors who purchase stocks and the bondholders who
offer loans to an organization (Hertig, 2019). Conse-
quently, companies are expected to make returns that
ensure that both investors and the debt holders get
expected returns on investments. The cost of capital may
entail the mechanical calculations by financial people,
which is then used by management to come up with a
hurdle or discount rate. Businesses have to exceed the
hurdle rate in justifying investments (Anderson, Byers, &
Groth, 2000).
Mostly, the costs of capital may be slightly under the
required rate of return (McNulty, Yeh, Schulze, &
Lubatkin, 2002). The costs of capital in a firm are used to
determine the soundness of an investment. Besides,
investors use the costs of capital to assess the riskiness of
an investment. Companies only choose to commit their
finances in projects whose return exceeds the costs of
capital. As such, managers should always look for invest-
ments that exceed the costs of capital in an individual
organization (Easley, O'Hara, & Yang, 2016). Conversely,
investors look at the beta or volatility of investments to
determine whether an investment is worthwhile. The
costs of capital determine the corporate strategies and the
ability of an organization to compete in the future. Busi-
nesses may use the costs of capital to make capital
budgeting decisions to offer a strategic advantage to a
firm in the short run.
Though investment opportunities' in organizations
differ, the techniques of evaluating the financial returns
are similar. However, the value of investments made an
organization depend on the profitability of the invest-
ment portfolio undertaken by a firm. The expectations
about an investment determine whether a company will
make positive or negative returns. The costs of capital
influence the hurdle rate and the capital structure in a
firm. Also, the costs of capital may determine the opera-
tions of a firm that in turn determine the profitability
(Scott & Pascoe, 1984). According to Kandelousi
TÜREGÜN 3
with earnings manipulation. Based on the 2018 Singapore
Directorship Report, Singapore does not have a high
number of multiple directorships per director, with 17.8%
of the directors holding two or more directorships
(Singapore Institute of Directors, 2018). If this report
holds some level of truth, the issue of multiple director-
ships may not be as prevalent as countries such as Hong
Kong and India, which are two of the top four nations in
the world with the highest number of multiple director-
ships (Lee, Cin, & Lee, 2016).
However, one salient point of this study is that it will
examine the level of multiple directorships and its effect
on firms based on the multiple directorships each board
has as a whole; hence, the level of multiple directorships
may have stark differences with the report. Furthermore,
there is only one provision and guidance relating to the
issue of multiple directorships under the Singapore Code
of Corporate Governance, which is not enforceable and is
on a “comply or explain”basis (Monetary Authority of
Singapore, 2018). Hence, this study may help to bring
some attention to the situation on multiple directorships
if need be. Past studies under the “busyness”hypothesis
argue that when a director holds multiple board seats,
especially three or more, the director will be overloaded
with commitments and the level of attention given to
each appointment will fall throughout (Ahn, Jiraporn, &
Kim, 2010; Cashman, Gillan, & Jun, 2012; Core,
Holthausen, & Larcker, 1999; Falato, Kadyrzhanova, &
Lei, 2014; Fich & Shivdasani, 2006; Jiraporn, Davidson
Iii, Dadalt, & Ning, 2009). However, the “reputation”
hypothesis that uses the resource dependence theory as a
theoretical perspective provides a counter-argument to
the “busyness”hypothesis (Fama & Jensen, 1983;
Pfeffer & Salancik, 1978). The “reputation”hypothesis
states that directors with multiple board seats have more
experiences, skills, and expertise and are able to tap on
valuable external resources, hence these reputable direc-
tors will have a higher level of monitoring capabilities as
compared to those with a lack of experience and expertise
(Fama & Jensen, 1983; Field, Lowry, & Mkrtchyan, 2013;
Masulis & Mobbs, 2011; Perry & Peyer, 2005). Therefore,
our impetus for this study is to adequately uncover the
impacts of multiple directorships. Earnings management
is studied here too as there is growing concern in today's
global market and in Singapore too (Kusnadi, 2011). In
past studies, Singapore is reported to have the highest
value in the anti-self-deal index of 1, where Singaporean
companies have the lowest motivation to employ earn-
ings management techniques for personal interests
(Djankov, La Porta, Lopez-De-Silanes, & Shleifer, 2008;
Gopalan & Jayaraman, 2011). However, it is certainly not
a country without corporate scandals. The 2004 China
Aviation Oil Scandal in Singapore casts light on how easy
earnings management can be conducted in Singapore,
where top management concealed derivative by manipu-
lating the financial statements (Arnold, 2004). Therefore,
this study will attempt to establish the link between mul-
tiple directorships and the level of earnings manipulation
in Singapore listed companies.
The remainder of this article is structured as follows.
First, we review the relevant literature and construct our
hypothesis. We then discuss our research methodology
comprising sample selection, data, and statistical models.
After delineating the descriptive statistics and correla-
tions for the final useable sample, we report the results
from our main empirical tests followed by additional ana-
lyses. Finally, we provide the conclusion of our paper in
the final section.
2|BACKGROUND, LITERATURE
REVIEW, AND HYPOTHESIS
2.1 |Corporate governance in Singapore
Singapore as a country has been perceived as a nation
that governs with an “iron first”and does not view any
unethical corporate practices lightly (Abdallah &
Ismail, 2017). Within Asia, studies have shown adulatory
reviews of Singapore's corporate governance (Ball,
Robin, & Wu, 2003; Goodwin & Seow, 2002; Steen, 2016).
Singapore also has the highest value in the anti-self-deal
index of 1, which indicates that the insiders of Singapor-
ean companies are least likely to conduct earnings
manipulation at the disadvantage of minority share-
holders (Djankov et al., 2008; Gopalan &
Jayaraman, 2011). Furthermore, Goodwin and
Seow (2002) point out that Singapore is one of the first
few nations that mandate the need for all listed compa-
nies to have an audit committee in the 1990s. In recent
studies, female representations in the company are often
linked to stronger corporate governance due to the higher
level of intrinsic monitoring mechanisms that females
possess (Adams & Ferreira, 2009; Arun, Almahrog, &
Aribi, 2015; Peni & Vahamaa, 2010; Srinidhi, Gul, &
Tsui, 2011). Firms with female representations are also
reported to have a lower level of earnings manipulation
and take on a more conservative stand on earnings
(Peni & Vahamaa, 2010) (Arun et al., 2015, Srinidhi
et al., 2011). However, in Singapore, there remains a low
level of female board representations at 6.4% and such
lamentable representation of female directors pale in
comparison with nations like the United States, United
Kingdom, China, and Malaysia (Low, Roberts, &
Whiting, 2015). The stark difference in female represen-
tation between Singapore and other countries may raise
2CHEE AND THAM
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