RELATIONSHIP BETWEEN THE FINANCIAL CAPABILITY OF INDEPENDENT DIRECTORS AND BOARD MONITORING EFFECTIVENESS

Abstract

The objective of this study is to examine the relationship between financial capability of independent directors and the monitoring of the companies of interest by the independent directors. The sample comprises 50 firms over the period 2020-25 and the analysis is done using fixed effects and dynamic estimation methods, where earnings management is used as a proxy for board monitoring. Independent Directors' financial capability is negatively correlated and statistically significant with earnings management, indicating that the greater the financial capability, the better the monitoring. The results are very strong after accounting for endogeneity problems. The rest of the control variables in the model have the following relation with earnings management: Firm age negatively relates with earnings management, the size of the firm has a weak positive relation with earnings management, and the Board size is not significant. The study contributes to previous work by emphasizing that director effectiveness is not just related to independence but to financial skills, and implications for the practice and design of corporate governance.