Does proximity to corporate headquarters enhance directors' monitoring effectiveness? A look at financial reporting quality

Abstract

Research question/issue: In this study, using a unique Canadian setting that relies on a principle-based corporate oversight environment and that has access to a large pool of U.S. directors, we investigate how directors' proximity to a firm's headquarters influences its financial reporting quality.Research findings/insights: Our results show that financial reporting quality is higher for firms whose boards (audit committees) consist of a greater proportion of independent directors who reside close to a firm's headquarters than for firms whose boards consist of directors who are more geographically dispersed. However, among nonlocal directors, the effect of nonlocal domestic directors on financial reporting quality is similar to the effect of local directors. In contrast, compared with local directors, the presence of U.S. directors has a negative impact on financial reporting quality.Theoretical/academic implications: Our results suggest that directors' proximity to corporate headquarters extends beyond geographical proximity and also reflects directors' familiarity with a firm's institutional environment. Institutional familiarity helps domestic nonlocal directors reduce information costs associated with low geographical proximity, thus providing them with access to a wider range of information sources and enhancing their monitoring ability, at least for financial reporting. In contrast, foreign directors face information costs arising from both low geographical proximity and less familiarity with the institutional environment.Practitioner/policy implications: Firms should take into consideration the consequences of nominating nonlocal directors on the monitoring of financial reporting quality. In addition, regulators should take a more comprehensive approach if they impose regulations such as board diversity initiatives, as regulatory pressures often imply appointing directors farther away from headquarters.

Geographical Diversity Among Directors and Corporate Social Responsibility

“…This research contributes to advancing the geographic diversity literature by directly extending Alam et al . (2018) and Firoozi, Magnan and Fortin (2019); it does so by providing the first evidence to our knowledge that geographically diverse boards can benefit firms by providing valuable advice on CSR issues, which eventually improves CSRP. Further, this paper is the first to our knowledge to examine this form of diversity in relation to CSRP, an area of increasing importance and relevance.…”

“…First, to the best of our knowledge, our study is the first to document a relationship between directors' location and CSRP. We extend the work of Alam et al (2018) andFiroozi, Magnan andFortin (2019), who explore the effect of directors' location on financial reporting quality. Our results show that geographical diversity of directors is not value destructive in this setting.…”

“…A few studies that investigate the effect of location of directors on firm performance focus on the financial aspect of their decision-making. For example, Alam et al (2018) and Firoozi, Magnan and Fortin (2019) investigate the impact of board geographic location on financial reporting quality. These studies provide evidence that directors' distance from corporate headquarters (and directors' geographical dispersion) decreases financial reporting quality.…”

“…We extend the work of Alam et al . (2018) and Firoozi, Magnan and Fortin (2019), who explore the effect of directors’ location on financial reporting quality. Our results show that geographical diversity of directors is not value destructive in this setting.…”

“…While geographically diverse boards may be weak monitors as documented in previous literature (e.g. Alam et al ., 2018; Firoozi, Magnan and Fortin, 2019), their advising abilities help to improve CSRP and eventually CFP. This work contributes more broadly to the board diversity and CSRP literature, by being the first to our knowledge to introduce this new demographic characteristic of directors that impacts the CSRP of firms.…”