International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss


Hafiza Aishah Hashim, Mohd Shaari Abdul Rahman

Our paper examines the relationship between the presence of interlocked directors on a board and earnings quality. For a sample of 554 firm-years spanning 2003 to 2004, we find that the presence of interlocked directors on board is associated with higher earnings quality as measured by the accrual quality model. It shows that the presence of interlocked directors on a board provides an incentive for diligent monitoring as they have the knowledge, expertise, skill and stronger incentive to actively monitor the actions of management and improve the quality of financial reporting. The relation, however, appears non-linear. Too many members in a firm with interlocking directorates appear to deteriorate the quality of earnings. Our results underscore the importance of the corporate governance recommendations of limiting the number of directorships held by any one individual as a means of strengthening the monitoring and oversight role that the board of directors play in the financial reporting process.

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