Corporate governance and value relevance of accounting information. Evidence from Kuwait

• Date: 09 April 2020
• Pages: 249-262
• DOI: https://doi.org/10.1108/IJOES-08-2019-0140
• Published date: 09 April 2020
• Author: Hesham I. Almujamed,Mishari M. Alfraih
• Subject Matter: Economics,Social economics

Corporate governance and

value relevance of

accounting information

Evidence from Kuwait

Hesham I. Almujamed and Mishari M. Alfraih

Department of Accounting, Public Authority for Applied Education and Training,

Kuwait City, Kuwait

Abstract

Purpose –This paper aimsto explore how thecharacteristics of the board of directors (BoD) shape earnings

and book value informationavailable to market participants.

Design/methodology/approach –The authors investigated the impactof board size, presence of non-

executives and role duality as proxies of effective corporate governance on the value relevance offinancial

reporting for 178 firms on the Kuwait stock exchangein 2013. Regression analysis based on Ohlson’s (1995)

valuationmodel was used to test hypotheses.

Findings –The authors found that board size was significantly associated with company value and that

Kuwaiti firms with large boardsincreased the value-relevance of earnings and book value.The influence of

role dualitywas positive although not significant. The presenceof non-executiveson the board had a negative

correlationwith market value (not significant).

Research limitations/implications –These findings deliver empirical supportfor the prediction that

the characteristics of the BoD improve the valuerelevance of financial reporting. Limitations such as small

sample size and one-yearduration of the study did not negate the basic findings, however. Future studieswill

use larger samples,longer duration and additional board characteristics.

Practical implications –This study provides empirical support for the hypothesis that board size

influencesmarket valuation. This study may benefit managers, investorsand other decision-makers.

Originality/value –This study delivers empirical evidence on the impact of board characteristics on the

value relevanceof accounting information.It will be useful for regulators and market participants monitoring

the influenceof boardcharacteristics on the value relevance of accounting information.

Keywords Kuwait, Value relevance, Board of directors, Corporate governance, Market valuation

Paper type Research paper

1. Introduction

A company’s board of directors (BoD) plays a central role in corporate governance as the

ones who do the hiring and firing, set the compensation for senior management teams and

resolve conflicts of interest among decision-makers and residual risk bearers (Fama and

Jensen, 1983;Baysinger and Butler, 1985). It has been argued that the multiple activities of

the BoD have allowed companies to economize on the agency costs associated with the

separation of ownershipand control and to facilitate their survival in a public organizational

form (Baysinger and Butler, 1985). The empirical literature on the role of the BoD

demonstrates that there is a significant relationship between the quality of financial

reporting and the quality of corporate governance as measured by the composition of the

board (Di Pietra et al., 2008). In surveying the literature on corporate governance, John and

Senbet (1998) claimed that the effectivenessof the BoD in monitoring corporate actions was

Corporate

governance

and value

relevance

249

Received26 August 2019

Revised21 September 2019

1 December2019

Accepted9 January 2020

InternationalJournal of Ethics and

Systems

Vol.36 No. 2, 2020

pp. 249-262

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-08-2019-0140

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