Strangers on the Board: The Impact of Board Internationalization on Earnings Management of Nordic Firms

Reggy Hooghiemstra, Niels Hermes*, Lars Oxelheim, Trond Randøy

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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.

Original languageEnglish
JournalInternational Business Review
Volume28
Issue number1
Pages (from-to)119-134
Number of pages16
ISSN0969-5931
DOIs
Publication statusPublished - Feb 2019
Externally publishedYes

Keywords

  • Foreign board members
  • Board diversity
  • Earnings management
  • Agency theory
  • Language
  • Linguistic relativity
  • Nordic countries

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