Impact of powerful CEOs on earnings quality in Bangladesh: The role of IFRS adoption and audit committee oversight / H M Arif

H M , Arif (2023) Impact of powerful CEOs on earnings quality in Bangladesh: The role of IFRS adoption and audit committee oversight / H M Arif. PhD thesis, Universiti Malaya.

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Abstract

Inflated corporate earnings have become an issue of extreme concern for investors, creditors, and regulators in Bangladesh. This study argues that variations in earnings quality in Bangladesh are primarily driven by chief executive officers (CEOs). In Bangladesh, CEOs are considered powerful because many of them are (i) closely related to the board chair; (ii) own a substantial portion of the firm's stock; (iii) secure multiple directorships of other firms; (iv) hold the CEO's position for a long time; and (v) have a link with the political party in power. Thus, CEOs with excessive power could act more opportunistically to boost their wealth at the expense of minority shareholders. Accordingly, relying on agency theory, a negative association between a powerful CEO and earnings quality has been anticipated. In addition, the moderating impact of effective audit committee oversight and the mandated implementation of international financial reporting standards (IFRS) on the link between CEO power and earnings quality has been investigated. The results demonstrate a significant negative association between CEO power and earnings quality using ten years of longitudinal data from the non-financial undertakings listed on the Dhaka Stock Exchange from 2010 to 2019. Although mandatory IFRS adoption shows an insignificant moderating effect, effective audit committee oversight significantly reduces the adverse effect of a powerful CEO on earnings quality. Further investigation reveals that CEOs with high structural, expert, and political power have a significant negative impact on earnings quality and that effective audit committee oversight improves earnings quality in the presence of CEOs with high structural, ownership, expert, and political power. These results remain robust after using alternative earnings quality proxies, an alternative measure of CEO power, and different estimation methods. This research adds to the existing body of knowledge by providing empirical evidence about the effect of CEOs’ power dynamics on earnings quality, including political and prestige-based power. In addition, it provides empirical evidence regarding the moderating effect of IFRS adoption and audit committee oversight on earnings quality. The findings of this study will help policymakers refine the existing corporate governance code to strike a balance of power between the CEO and other top executives, and regulatory bodies will be motivated to take the initiatives to implement the adopted IFRS effectively.

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