Does the board of directors and (non)-executives’ ownership mitigate interest payment classification shifting? UK Evidence
Does the board of directors and (non)-executives’ ownership mitigate interest payment classification shifting? UK Evidence
We investigate whether the board of directors and stock ownership by outside directors and executives may limit interest payment classification shifting within the statement of cash flows. We find that the interest payment classification shifting is less prevalent in UK firms with high-quality internal governance, demonstrating that effective internal governance may serve as a substitute for rules-based accounting standards. While we find governance mechanisms play a crucial role in mitigating such practice in both distressed and non-distressed firms, our finding is more pronounced in non-distressed firms. We also find that there is an inverted U-shaped relationship between the board independence, managerial and independent directors’ stock ownership, and the classification shifting of interest payment; indeed, it is premature to propose that independent and stock ownership can serve as an effective mechanism in mitigating managerial opportunism in all cases, and indeed, there should be optimal independent director and ownership thresholds before which caution would be required to ensure that managers remain focused on maximizing shareholder value.
Hessian, Mohamed
639d0b08-b2e5-46f0-a5bd-5f0e126b0f23
Zalata, Alaa
0fc2c56d-97ad-44ce-ab31-63ca335dcef6
Hussainey, Khaled.
79586e46-b4c8-455c-ad6b-88e9334d9051
Hessian, Mohamed
639d0b08-b2e5-46f0-a5bd-5f0e126b0f23
Zalata, Alaa
0fc2c56d-97ad-44ce-ab31-63ca335dcef6
Hussainey, Khaled.
79586e46-b4c8-455c-ad6b-88e9334d9051
Hessian, Mohamed, Zalata, Alaa and Hussainey, Khaled.
(2024)
Does the board of directors and (non)-executives’ ownership mitigate interest payment classification shifting? UK Evidence.
Journal of International Accounting, Auditing and Taxation.
(In Press)
Abstract
We investigate whether the board of directors and stock ownership by outside directors and executives may limit interest payment classification shifting within the statement of cash flows. We find that the interest payment classification shifting is less prevalent in UK firms with high-quality internal governance, demonstrating that effective internal governance may serve as a substitute for rules-based accounting standards. While we find governance mechanisms play a crucial role in mitigating such practice in both distressed and non-distressed firms, our finding is more pronounced in non-distressed firms. We also find that there is an inverted U-shaped relationship between the board independence, managerial and independent directors’ stock ownership, and the classification shifting of interest payment; indeed, it is premature to propose that independent and stock ownership can serve as an effective mechanism in mitigating managerial opportunism in all cases, and indeed, there should be optimal independent director and ownership thresholds before which caution would be required to ensure that managers remain focused on maximizing shareholder value.
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Accepted/In Press date: 19 February 2024
Identifiers
Local EPrints ID: 488610
URI: http://eprints.soton.ac.uk/id/eprint/488610
ISSN: 1061-9518
PURE UUID: e09f3ffe-8877-4aba-97f3-f403a6333407
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Date deposited: 27 Mar 2024 17:54
Last modified: 28 Mar 2024 02:47
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Author:
Mohamed Hessian
Author:
Khaled. Hussainey
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