5. Conclusion This is the first study to analyze the mitigating role of corporate governance on financial reporting qual

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5 Conclusion This Is The First Study To Analyze The Mitigating Role Of Corporate Governance On Financial Reporting Qual 1 (75.09 KiB) Viewed 75 times

5 Conclusion This Is The First Study To Analyze The Mitigating Role Of Corporate Governance On Financial Reporting Qual 2 (35.91 KiB) Viewed 75 times

5. Conclusion This is the first study to analyze the mitigating role of corporate governance on financial reporting quality during the COVID-19 pandemic. By examining the real earnings management behavior of companies, we find that the financial reporting quality is lower during the pandemic. This may be because companies use real earnings management to avoid further negative reaction of investors (Persakis and Intridis, 2015) or to survive during the crisis (Trombetta and Imperatore, 2014). In addition, we show that a larger board helps to mitigate the negative impact of COVID-19 on financial reporting quality. This may be because of the better monitoring and advising provided by a larger board (Boone et al., 2007; Coles et al., 2008; Guest, 2009; Lu and Boateng, 2018). However, we do not find significant evidence on the mitigating effect of board independence and CEO duality. Our paper adds to the ongoing discussion of COVID-19 and presents important evidence that a larger board can help alleviate the negative impact of COVID-19 on financial reporting quality. Since good financial reporting quality helps financial market participants, such as investors and lenders, make proper decisions and helps to improve the efficiency of financial markets, our results provide useful insight for policymakers and investors. For example, due to more real earnings management activities during the pandemic, investors and lenders should be more careful when interpreting financial reporting results. Companies can also improve their corporate governance (particularly regarding board size) to ensure high quality of financial reporting during the pandemic. Furthermore, UK regulators are now in the process of amending corporate governance regulations, which are regarded as an important reform of corporate governance, and the responsibility of directors on the board is under debate (Financial Times 2021). Our results encourage regulators to consider both the monitoring and advising roles of the board which are particularly crucial during a crisis like the COVID-19 pandemic and help regulators evaluate whether current regulations regarding board structure (e.g., board independence and CEO duality) are effective in ensuring high financial reporting quality during the pandemic. This study is subject to some limitations. First, because data on accounting variables are annual, we treat the year 2020 as the pandemic period. Since the pandemic becomes a fact a little later (e.g., in the UK, the first COVID-19 case was confirmed on 31 January
Y.-L. su and Y. C. Yang Finance Research Letters xxx (xxxx) xxx 2020 and the stay-at-home order was announced on 23 March 2020), our results may not fully present the impact of the pandemic. Similarly, it is possible that other contemporary events, such as Brexit, may affect our results. Furthermore, this paper focuses on the UK data and this single-country approach allows us to prevent results from being affected by other country-level factors (Cameran et al., 2014). Our results would be relevant to countries that have similar institutional settings (e.g., country-level governance or legal enforcement) and have similar experience of COVID-19 as the UK. However, we acknowledge that the findings may be different in other countries which are affected by the pandemic differently and with different institutional settings. Our research provides early evidence on this topic, and future research is recommended to use data from other countries. Currently, only one-year accounting data is available. When data for more years becomes available, it is recommended to further investigate the impact of COVID-19 on financial reporting quality, including any time-lag effect.