Empirical relationship between board characteristics, earnings management, insolvency risk, and corporate social responsibility

Figures & data

Figure 1. Transparency score.

Source: Transparency International Index.

Figure 2. Research model.

Sources: Authors work.

Table 1. M-score method measurement.

M-score method indicators	Code	Measurement
Days Sales in Receivables Index	DSRI	(Net Receivablest/Salest)/Net Receivablest-1 /Salest-1)
Gross Margin Index	GMI	[(Salest-1 - Cost of Goods Soldt-1)/Salest- 1]/[(Salest - Cost of Goods Soldt)/Salest]
Asset Quality Index	AQI	[1 - (Current Assetst + Plant, Property & Equipmentt)/Total Assetst]/ [1 - (Current Assetst-1 + Plant, Property & Equipmentt-1) /Total Assetst-1)]
Sales Growth Index	SGI	Salest/Salest–1
Depreciation Index	DEPI	(Depreciationt-1/ (Plant, Property & Equipmentt-1 + Depreciationt-1))/(Depreciationt/(Plant, Property & Equipmentt + Depreciationt))
M-score	−4.84 + (DSRI + GMI + AQI + SGI + DEPI)

Sources: Cited from (Hołda, 2020).

Table 2. Board characteristics measurement.

Variables	Code	Measurement	References
Board Financial Expertise	Bex	A dummy variable is 0 for no financial experience and 1 for financial expertise with professional certificates, such as CPA, CFP, ChFC, CFA, FRM, and CMA.	(Jeanjean & Stolowy, 2009)
Board size	BSize	Number of board members
Ownership Concentration	OWC	A percentage of shares owned by the company’s largest shareholder	(Sáenz González & García-Meca, 2014)

Sources: Authors.

Table 3. CSR measurement.

Inter-rater reliability test using Krippendorff’s alpha item	Obs	Sign	Alpha
Social items	350	+	0.7771
Environmental items	350	+	0.6953
Sustainability	350	+	0.7383
Product responsibility	350	+	0.6978
Stakeholders	350	+	0.5773
Test scale 10602.78 0.7442 mean (unstandardized items)

Sources: content analysis.

Figure 3. Inner model.

Sources: Smart PLS output.

Table 4. The goodness of fit model.

Variable	R Square
EM	0.106
Insolvency Risk	0.231

Sources: Smart PLS output.

Table 5. Direct impact.

	Standard deviation (STDEV)	T statistics (|O/STDEV|)	P-values	Results
H1. Financial expertise -> Earning management	0.132	3.099	0.001	Supported
H2. Insider ownership -> Earning management	0.052	3.672	0.000	Supported
H3. Board size -> Earning management	0.061	2.332	0.010	Supported
H4. Financial expertise -> Insolvency risk	0.105	1.982	0.024	Supported
H5. Insider ownership-> Insolvency risk	0.039	3.362	0.000	Supported
H6. Board size -> Insolvency risk	0.041	8.601	0.000	Supported
H7. Earning management -> Insolvency risk	0.044	4.145	0.000	Supported

Sources: Smart PLS output.

H1: Financial expertise -> earning management, with a T-statistic of 3.099, points to a significant relationship between financial expertise and earning management. The p-value of 0.001 reinforces the significance, implying that higher levels of financial expertise are associated with decreased earnings management.

H2: Insider ownership -> earning management, with a T-statistic of 3.672, indicates a significant relationship between the presence of insider ownership and earnings management. The p-value of 0.000 suggests that companies with insider ownership tend to exhibit significantly lower levels of earnings management.

H3: Board size -> earning management, having a T-statistic of 2.332, denotes a significant relationship between board size and earnings management. The p-value of 0.010 means that the association is statistically significant. This implies that as board size increases, earnings management tends to decrease significantly.

H4: Financial expertise -> insolvency risk, with a T-statistic of 1.982, suggests a pronounced relationship with insolvency risk, indicating that financial expertise is a statistically significant predictor of insolvency risk.

H5: Insider ownership -> insolvency risk, with a T-statistic of 3.362, indicates a significant relationship between the presence of insider ownership and insolvency risk. The p-value of 0.000 suggests that companies with insider ownership have a significantly lower risk of insolvency.

H6: Board size -> insolvency risk, having a T-statistic of 8.601, is indicative of a highly significant relationship between board size and insolvency risk. The p-value of 0.000 reinforces the statistical significance, suggesting that larger boards are associated with a substantially lower risk of insolvency.

H7: Earning management -> insolvency risk, with a T-statistic of 4.145, signifies a significant relationship with insolvency risk. The p-value of 0.000 underscores the statistical significance, denoting that changes in earnings management are associated with a significant increase in the likelihood of insolvency risk.

Table 6. Specific indirect effects.

	Standard deviation (STDEV)	T statistics (|O/STDEV|)	P-values	Result
H8. Financial expertise -> Earning management -> Insolvency risk	0.033	2.265	0.012	Supported
H9. Insider ownership -> Earning management -> Insolvency risk	0.013	2.715	0.003	Supported
H10. Board size -> Earning management -> Insolvency risk	0.013	2.063	0.020	Supported

Sources: Smart PLS output.

Based on the indirect effects Table 6, H8: Financial expertise -> earning management -> insolvency risk. The standard deviation for the mediation path was 0.033. The T-statistic of 2.265 and a p-value of 0.012 suggest that the mediation path through earning management was statistically significant. This indicates that earnings management acts as a mediator in the relationship between financial expertise and insolvency risk.

H9: Insider ownership -> earning management -> insolvency risk. Its standard deviation for the mediation path was 0.013. With a T-statistic of 2.715 and a p-value of 0.003, the mediation path through earnings management was statistically significant. This implies that earnings management mediates the relationship between the presence of insider ownership and insolvency risk.

H10: Board size -> earning management -> insolvency risk. The standard deviation for the mediation path was 0.013. The T-statistic of 2.063 and a p-value of 0.020 suggest that the mediation path through earnings management was statistically significant. This denotes that earnings management mediates the relationship between board size and insolvency risk.

Table 7. Moderating effect.

	Standard deviation (STDEV)	T statistics (|O/STDEV|)	P-values	Result
H11. CSR x Earning Management -> Insolvency Risk	0.100	3.809	0.000	Supported

Sources: Smart PLS output.

H11: The standard deviation for the interaction term was 0.100. The T-statistic of 3.809 indicates a significant moderation effect of CSR on the relationship between earning management and insolvency risk. The low p-value of 0.000 suggests that the interaction term was statistically significant, implying that CSR moderates the impact of earnings management on insolvency risk.

Hołda, A. (2020). Using the Beneish M-score model: Evidence from non-financial companies listed on the Warsaw stock exchange. Investment Management and Financial Innovations, 17(4), 389–401. https://doi.org/10.21511/imfi.17(4).2020.33

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Jeanjean, T., & Stolowy, H. (2009). Determinants of board members’ financial expertise—Empirical evidence from France. The International Journal of Accounting, 44(4), 378–402. https://doi.org/10.1016/j.intacc.2009.09.002

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Sáenz González, J., & García-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419–440. https://doi.org/10.1007/s10551-013-1700-8

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Data availability statement

The data are in the hands of the principal researcher, and we can provide it to editors when needed. The data that support the findings of this study are available in Iraq Stock Exchange at http://www.isx-iq.net/. These data were derived from the following resources available in the public domain: http://www.isx-iq.net/