The effect of corporate governance and firm-specific characteristics on the incidence of financial restatement

Abstract

Purpose This paper aims to examine the effects of corporate governance and firm-specific characteristics on the incidence of financial restatement among Malaysian public listed firms. Design/methodology/approach The elements of corporate governance consist of board size, board independence, multiple directorships, audit committee expertise, external audit quality and executive compensation. Meanwhile, the firm-specific characteristics consist of firm age, firm performance, firm leverage and firm liquidity. The agency theory has been used to guide the study. This study used a matched-pair sample that consisted of a sample of 49 restatement firms and 98 non-restatement firms between the years 2011 and 2016. Univariate (t-test and Pearson correlation) and multivariate (logistic regression) statistical techniques were used to test the hypotheses. Findings The results show that there is a negative and significant relationship between executive compensation and firm performance, and the incidence of financial restatement. In addition, there is a positive and significant relationship between firm leverage and the incidence of financial restatement. However, the other corporate governance and firm-specific characteristic variables included in the study were found to be insignificant with the incidence of financial restatement. This paper provides evidence that some form of corporate governance mechanisms and firm-specific characteristics, particularly executive compensation, firm performance and firm leverage, may influence the direction and magnitude of the incidence of financial restatement. The findings indicate that optimal executive incentives may align management interests with those of shareholders. In addition, greater performance and lower leverage levels minimise firms’ financial pressure and debt covenant violation risk, which may reduce the management tendency to misstate the financial statement, and consequently, minimise the likelihood of financial restatement. Originality/value The main value of this paper is the effect of corporate governance and firm-specific characteristics on the likelihood of financial restatement in Malaysia. The findings of this study provide useful insights for regulators to improve and reconsider the current regulations on corporate governance mechanisms.

Does Firm Performance Impact Top-Level Executive Compensation in ESG Companies? Evidence from India

“…Jensen and Murphy (1990) in their work stated that there exists pay-performance sensitivity and firm performance shows a positive influence in CEO pay. The positive relationship between the two aspects is being given by Farooque et al (2019), McGuire (2018, Waddock and Graves (1997), Griffin and Mahon (1997) while the negative relationship is indicated by Amewu and Alagidede (2021), Hasnan et al (2020), Kline et al (2017), Wright and Ferris (1997) among others. Works of Nicola et al (2016) and Firth et al (2006) established no relationship between both the constructs.…”

“…When it comes to leverage of the firm, studies like Brisley et al ( 2021), Ghasemi and Ab Razak (2020), Hasnan et al (2020), Malik and Shim (2019), Mehran (1995), Lewellen, Loderer, and Martin (1987), Jensen (1986), Ross (1977), John and John (1993) have brought out the relation of debt financing and its corresponding effect on pay-performance concept. Leverage is considered as an alternative to the remuneration pay for firms having high cash-flows that can exert managerial discipline and enhance critical observation of use of debt-finance by the managers.…”

Board Characteristic and Financial Restatement

“…The larger the number of BoD, the more influential the financial reporting process. However, previous studies have shown conflicting results (Hasnan et al, 2020). Several researchers found that the BoD size had a negative effect on financial restatement (Hasnan et al, 2017(Hasnan et al, , 2020Puspitasari & Januarti, 2014).…”

“…This system positions the BoD as one of the company's organs with a central role (Hidayat & Utama, 2017). BoD acts as an executive responsible for the company's operational activities (Harymawan, 2018;Hasnan et al, 2020). Besides, BoD provides experience, knowledge, and business expertise (Hasnan et al, 2017;Nugraheni & Muhammad, 2019).…”

“…BoD size is considered to determine the quality of financial information submitted to the public (Altarawneh et al, 2020). The larger size is considered to have higher reporting quality (Hasnan et al, 2020). The larger the number of BoD, the more influential the financial reporting process.…”