Exploring corporate governance and financial accounting in small Irish firms

The objective of this thesis is to explore the under-researched area of corporate governance in small firms with an explicit focus on the potential value of a nonexecutive director (NED) on the small firm board and explicitly including the production and use of financial accounting information in small firm governance research. This is motivated by a desire to better understand corporate governance in small Irish firms and by the challenge of attempting to translate insights from theoretical work on large listed firms to small firms. A testable conceptual framework based on the two interlinked themes of interest, also including demographic and economic performance variables, is proposed. The role of the external accountant and the nature of the small firm-banking relationship are also explored. Following a broadly objectivist methodological tradition, data were collected from 79 small firm owners/managers using a survey instrument; five short qualitative interviews were conducted. Strength of association, logistic regression, and innovative multiple hypothesis testing (MHT) techniques, a methodological contribution of the thesis, were applied to data analysis. The study found statistically significant associations between both corporate governance mechanisms (non-executive director related) and economic growth; small firms with at least one NED on their boards are found to be more than three times more likely to experience growth. These small firms are found to be sophisticated in production and use of FAI; they actively track financial position and cashflow. International marketoriented small firms are more likely to experience growth, to produce both useful and sophisticated FAI, and to have both a NED on board and an active board. The external accountant is mainly involved in compliance related areas such as tax planning, auditing and statutory account preparation. There is little evidence of any financial intermediation but the more general small business advisory role is probably a core relation in local and national market oriented firms, a useful finding in terms of policy. The small firm-banking relationship is found to be asymmetric in terms of power, risk and information flows; its asymmetric nature is evident in credit matters related to assetbased collateral as distinct from prospect-based lending, in financial information flows, and in a very weak advisory role when compared to the board or external accountant. The thesis may be viewed as making a modest contribution to small firm theory development as stewardship theory and both the resource-based view and resource dependency theory are shown to have some explanatory power related to corporate governance; the stewardship function of financial accounting is also highlighted. The control model is found to be more relevant to local market oriented firms than the market model; the high levels of financial and business disclosure demanded by the latter, which the international market oriented segment of the sample satisfies, requires further research on possible transitions from one to the other and why, how and when non-executive directors join such boards.