Examining the Moderating Role of Firm Characteristics in the Corporate Governance-Financial Reporting Quality Nexus: Evidence From a Developing Country
Authors: Baaba Amanamah Richmell 
Published: April 2024

Corporate governance is a stewardship system where directors are expected to provide leadership and supervision of the management of an organization and communicate to the absentee owners on the progress and performance of the organization, including through financial reporting. International Financial Reporting Standards (IFRS) were created to ensure corporate transparency, comparability, consistency and integrity of financial reporting. Since corporate governance is to ensure the effective operation of an organization, it is assumed that corporate governance will lead to quality financial reporting all other things being equal. Despite the existence of numerous publications on the relationship between corporate governance and financial reporting quality, the scientific literature still lacks comprehensive studies on the impact of individual firm characteristics on this relationship. The objective of this study is to assess how firm characteristics such as Firm size, Firm age, and ROA influence the relationship between corporate governance and the quality of financial reporting. A regression analysis based on balanced panel data of 598 observations from 46 companies in Ghana with full annual reports from 2009 to 2021 allowed us to assess the impact of such corporate governance variances as Board Size, Board Gender Diversity, and Independence of the Audit Committee on IFRS compliance. Mitigating effects and hypothetical correlations between variables were assessed using the STATA software package. Using the Hausman test, the appropriateness of the fixed effects model was substantiated (model specifications for proxy variables and moderating variables were built). The first part of the study was based on the results of linear regression. The linear regression results suggest that Board Size significantly predict IFRS compliance with a coefficient of 0.003 and p-value of 0.028. The independence of the Audit Committee exhibits a positive and statistically significant relationship with IFRS compliance, with a coefficient of 0.027 and a p-value of 0.018. Board Gender Diversity, despite having a coefficient of 0.024, does not display a statistically significant relationship with IFRS compliance (p=0.682). The second part of the study involved analysis to assess the moderating effect of firm characteristics on the relationship between corporate governance and financial reporting quality (an effect that occurs when a third variable changes the nature of the relationship between a predictor and an outcome, especially in analyses such as multiple regression). In this case, the results were different. In particular, Board Size does not significantly influence IFRS compliance with a coefficient of 0.001 and p-value of 0.477. Board Gender Diversity negatively influences IFRS compliance with a coefficient of -0.882 and is highly significant at the 1% level. The Independence of the Audit Committee is positively associated with IFRS compliance, with a coefficient of 0.233 and significance at the 1% level. In terms of firm characteristics, Firm Size and Return on Assets both exhibit significant negative relationships with IFRS compliance, while Firm Age (FA) has a positive effect, all significant at the 5% level. Again, the findings of the study showed that the relationship between board size and IFRS compliance changes depending on the firm’s return on assets and that there is a significant positive interaction between Board Gender Diversity and firm characteristics. While firm size and firm age significantly moderate the relationship between the independence of the audit committee and IFRS compliance. The findings of the study indicated a significant impact of both Board Gender Diversity and Independence of the Audit Committee on the level of compliance with International Financial Reporting Standards (IFRS). Specifically, the link was shown to be highly influenced by firm characteristics such as size, age, and return on assets. Thus, the study allowed us to confirm the hypothesis that the success of corporate governance in guaranteeing high-quality financial reporting depends on certain characteristics of the organisation. It is advisable for regulatory agencies to consider the modification of governance principles to align with the unique characteristics of specific firms. There is a growing call for firms to actively promote and support gender diversity among their Board of directors, as well as prioritize the independence of their Audit committees. Furthermore, it is advisable for organisations to adopt a proactive stance to enhance internal controls and implement targeted training programmes for board members, with the aim of effectively addressing unique issues faced by the organisation.