Jui-Chin Chang and Huey-Lian Sun
This study aims to examine the reputation effect by assessing whether fraudulent financial reporting is associated with high board turnover and significant loss of directorship…
Abstract
Purpose
This study aims to examine the reputation effect by assessing whether fraudulent financial reporting is associated with high board turnover and significant loss of directorship held by directors affiliated with fraud firms. Although the Sarbanes–Oxley Act (SOX) and major stock exchanges enhance board independence and formalize committee requirements, the new rules also create a high demand for qualified directors in the director labor market. Thus, this study further examines the change in the reputation effect of directors at fraud firms after SOX.
Design/methodology/approach
This paper intends to answer two research questions: Do directors suffer significant loss of reputation when firms are caught in fraudulent financial reporting schemes? Is the loss of reputation of directors at fraud firms affected by the regulation of SOX? To examine the reputation effect, this paper investigates the differences in director turnover and loss of directorships between fraud and non-fraud firms. To examine the regulation effect, this paper investigates the differences in director turnover and loss of directorships of directors at fraud firms by comparing non-fraud firms’ director turnover and directorship loss between the pre-SOX and post-SOX periods.
Findings
Consistent with the reputation effect, this paper found that director turnover at fraud firms is significantly higher than that at non-fraud firms. It also found that the loss of directorships of directors at fraud firms is not significantly higher, which is consistent with findings of some prior research. The paper also investigates whether this reputation effect has changed after SOX but found no significant difference in the reputation effect at fraud firms. In conjunction with prior research that finds an increased demand for qualified directors in the labor market after SOX, the results imply that this shortage of qualified directors does not help fraud firms discipline directors after SOX.
Research limitations/implications
The findings are limited by the sample selection of only the initial litigation of US firms which are charged of fraudulent financial reporting. The findings suggest that SOX creates an increased demand for qualified directors, and consequently results in a shortage of qualified directors in the post-SOX labor market. The shortage of qualified directors slows the director turnover and weakens firms’ ability to replace culpable directors. Future research is needed on how governance practices might contribute to the lack of turnover among board members and how to promote ongoing overhauls of boards.
Practical implications
The decision process for removing a director is complicated and lacks transparency. Shareholders often do not know the real reason for a director’s departure from the board. To increase the accountability of individual directors and information transparency, new rules are needed for the disclosure of evaluations of individual directors’ governance effectiveness.
Originality/value
Survey of previous studies (Helland, 2006; Srinivasan, 2005; Fich and Shivdasani, 2007) indicates mixed evidence on reputation effect and no evidence so far on the SOX regulation effect. This study fills the gap by extending the findings of prior research to investigate the reputation effect along with the regulation effect of SOX at fraud firms. Different from findings of some previous studies (Helland, 2006; Fich and Shivdasani, 2007), this paper provides evidence consistent with the reputation effect. It also provides new evidence on the unintended consequences of SOX on director turnover.
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Jui‐Chin Chang and Huey‐Lian Sun
The Sarbanes‐Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. This paper's aim is to investigate…
Abstract
Purpose
The Sarbanes‐Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. This paper's aim is to investigate whether SOX's recently mandated disclosure of corporate governance structures affects the market's perception of earnings informativeness and firms' earnings management.
Design/methodology/approach
Since the first compliant disclosure of the Act would be found in firms' 2002‐2003 financial reports, the authors retrieve the post‐SOX data (pre‐SOX data) from the 2002 to 2003 (2001‐2002) period. Further, the study adopts Anderson et al.'s model to test the relations between earnings informativeness, audit committee independence, and other corporate governance variables. A similar mode is used by Chang and Sun in their study of cross‐listed foreign firms. To measure the discretionary accruals, the authors adopt Kothari et al.'s model and use the two‐digit SIC code in the cross‐sectional regression.
Findings
It is found that the market valuation of earnings surprises is significantly higher for firms which disclose stronger corporate governance functions. It is also found that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure.
Originality/value
The empirical evidence shows that the quality of accounting earnings is increased after the SOX's mandated disclosure, which strengthens the link between financial reporting and corporate governance functions.
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Abstract
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Nadiye Ozlem Erdil and Omid M. Arani
This paper aims to investigate to what extent quality function deployment (QFD) can be used in quality improvement rather than design activities.
Abstract
Purpose
This paper aims to investigate to what extent quality function deployment (QFD) can be used in quality improvement rather than design activities.
Design/methodology/approach
A framework was developed for implementation of QFD as a quality improvement tool. A case study approach is used to test this framework, and quality issues were analyzed using the framework in a ceramic tile manufacturing company.
Findings
The results showed considerable improvements in the critical quality characteristics identified and sales rates, demonstrating the potential of QFD to be used in assessing and prioritizing areas of improvement, and converting them into measurable process or product requirements.
Research limitations/implications
One case study was completed. More studies would be beneficial to support current findings.
Practical implications
This framework provides structured approach and guidelines for practitioners in adapting QFD for quality improvements in existing products or processes.
Originality/value
This study proposes a new framework to use QFD in quality improvement activities, expanding its application areas. Moreover, the results of the literature study performed provide a valuable collection of practical QFD implementation examples.