Does top management team diversity affect accounting quality? Empirical evidence from Germany

Abstract

Earnings management decisions and ineffective monitoring activities have contributed to financial accounting scandals and reduced confidence in firms’ reporting quality among potential investors, lenders and other creditors. The implementation of an effective top management team (TMT) is considered essential in this context. It is well known that top managers have considerable discretion over firms’ financial reporting since they choose whether and how to manage earnings. However, research has yet to establish the relationship between top managers’ diversity attributes and firms’ earnings management levels. Therefore, this study analyses whether and how top managers’ nationality, gender and age diversity are associated with accounting quality. Based on a sample of German DAX 30 listed firms from 2011 to 2018, we found that diversity in TMT nationality and gender have a positive impact on accounting quality. This relationship is context-dependent and negatively moderated by the tenure of the chief financial officer. Our findings provide novel insights on accounting quality for practitioners such as investors, regulators and stock corporations. The implications of this study further advance the academic debate on diversity in TMTs and its effects on earnings management.

Toward an alternative measure of board diversity: an exploratory study on board polarization in German stock exchange-listed companies

“…However, the question of how a higher proportion of women in boards affects corporate performance is controversial and the empirical evidence is inconclusive (Reddy and Jadhav, 2019). While some authors find positive effects on firm performance (Schumann et al, 2023;Brahma et al, 2020;Adams and Ferreira, 2016;Joecks et al, 2013), others report negative (Hosny and Elgharbawy, 2022) or non-significant results (Fleischer, 2022;Rose, 2007).…”

“…Besides the demographic characteristics of age and gender, recent studies on board composition increasingly take into account the ethnic and cultural background of board members. In multinational companies, for example, it is common practice to fill board positions with people of different nationalities (Schumann et al, 2023;Harjoto et al, 2019). Cultural diversity created in this way is assumed to open up different ways of solving problems and break down rigid ways of thinking that can occur in culturally homogeneous boards (Nederveen et al, 2013).…”

“…, 2021), strategy formulation (Valls Martínez et al. , 2019; Baysinger and Hoskisson, 1990), accounting quality (Schumann et al. , 2023), financial performance (Hosny and Elgharbawy, 2022) and business performance (Brahma et al.…”

“…Nevertheless, board composition has been identified by many authors as a critical success factor for companies (Dobija et al, 2022;Huang et al, 2020;Tyrowicz et al, 2020;Krause et al, 2019;Johansen et al, 2017). Thus, many studies have examined gender, age, educational, functional and ethnical board members diversity for their impact on communication (Tuggle et al, 2010;Gillette et al, 2003), decision-making (Thompson and Adasi Manu, 2021;Rao and Tilt, 2015), risk-taking (D ıez- Esteban et al, 2022;Adelopo et al, 2021;Noja et al, 2021), strategy formulation (Valls Mart ınez et al, 2019;Baysinger and Hoskisson, 1990), accounting quality (Schumann et al, 2023), financial performance (Hosny and Elgharbawy, 2022) and business performance (Brahma et al, 2020;Fleischer, 2022). Methodologically, most studies rely on the concept of fractionalization.…”

The relationship between women and racial minority employees/managers and financial performance

“…Surface-level characteristics act as a stand-in for cognitive resources and personal, difficult to discern, characteristics (Jackson et al , 1995; Soleimani and Stauffer, 2022; Wang et al , 2022). For instance, research using upper echelons theory has demonstrated linkages between the demographic characteristics of a firm’s leaders and organizational decisions and outcomes (Finkelstein et al , 1996; Javed et al , 2023; Roberson and Hyeon, 2007; Schumann et al , 2023). In line with this stream of thinking, race and gender have often been used in diversity research as proxies for differences in perspectives and human capital (Hillman et al , 2002; Kolev and McNamara, 2020; Roh and Sung, 2022).…”