The relationship between minority directors and earnings management: an empirical analysis in the Italian institutional setting

Abstract

Purpose

Although the previous literature considers independent directors as an internal mechanism for good corporate governance and higher financial disclosure quality, in contexts characterized by high ownership concentration, they may lack the mandate, the incentives and the ability to be an effective monitoring mechanism. Therefore, this study aims to focus on minority directors and investigate their impact on the earnings management activities for firms with concentrated ownership structures.

Design/methodology/approach

As the slate voting system is a peculiar feature of Italian corporate governance regulations, which gives minority shareholders the right to appoint at least one member of the board of directors (minority directors), this paper carries out a quantitative empirical analysis based on a sample of non-financial companies listed on the Italian Stock Exchange to test the role played by minority directors in increasing incentives towards higher financial reporting quality.

Findings

Robust to different model specifications, including the endogeneity test, empirical findings show a negative relationship between minority directors and earnings management, while no relationship holds between the latter and independent directors, suggesting that minority directors might promote greater directors’ accountability than independent directors in highly concentrated ownership structures.

Originality/value

Relying on the empirical findings, this paper offers new insights on a peculiar internal corporate governance mechanism related to one of the most debated issues among financial market practitioners and regulators, namely, the protection of minority shareholders. Moreover, this paper offers new insights for academics and practitioners on a peculiar governance mechanism that could soon be widely adopted.

Citation

Fera, P., Moscariello, N., Pizzo, M. and Ricciardi, G. (2022), "The relationship between minority directors and earnings management: an empirical analysis in the Italian institutional setting", Corporate Governance, Vol. 22 No. 7, pp. 1624-1645. https://doi.org/10.1108/CG-06-2021-0224