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  • Sakthi Mahenthiran 1,*,
  • Berta Silva Palavecinos 2 and
  • Hanns De La Fuente-Mella 2

Reviewer 1: Anonymous Reviewer 2: Anonymous Reviewer 3: Anonymous

Round 1

Reviewer 1 Report

attached

Comments for author File: Comments.pdf

Author Response

See attached file for the point-by-point responses to Reviewer 1's comments. 

Author Response File: Author Response.pdf

Reviewer 2 Report

A good piece of paper in the context of governance and misstatement. I have a few observations: 

  1. Discussion mostly in the result section must be covered by institutional setting/ theory. 
  2. Data coverage is 2009-2015; it is necessary to update data collection because it is 2020. 
  3. It is better to use alternative variables to check the robustness test (sensitivity analysis)
  4. The implication could be more precise in the context of managerial and theoretical understanding. 
  5. It Is necessary to check endogeneity issues specially fixed or random effects.
  6. The moderation effect is not clear to me please confirms it.   
  7. Update the referencing. 

Ref

Masud, M.A.K; Bae, S; Javier, M; & Kim, J.D. (2019). Board Directors’ Expertise and Corporate Corruption Disclosure: The Moderating Role of Political Connections, Sustainability,11 (16), 4491.

Masud, M.A.K; Nurunnabi, M; & Bae, S. (2018). The Effects of Corporate Governance on Environmental Sustainability Reporting: Empirical Evidence from South Asian Countries, Asian Journal of Sustainability and Social Responsibility, 3(3), 1-26

Author Response

Please see attached file for the point-by-point response to Reviewer 2's comments.

Author Response File: Author Response.pdf

Reviewer 3 Report

Summary of the paper

Using data from Chile, this paper investigates the impact on earnings quality, of three different corporate governance characteristics.  Earnings quality is proxied inversely, as the probability of being required to re-state earnings.  The three corporate governance characteristics are noted in the paper’s title.  The authors mount arguments about salient institutional features of Chile: disincentive for external auditors to perform high-quality audits, incentive for Chilean companies to conduct related party transactions opportunistically and surreptitiously and investors’ perception that board-related corporate governance mechanisms are of high quality.

 

Four hypotheses are developed.  The first postulates that audit partner tenure is negatively associated with the probability of misstatement.  The other three hypotheses are bi-directional.  The second hypothesis conjectures that the presence, on the board, of directors with multiple directorships, is associated with the probability of misstatement.  The third hypothesis states that the amount and value of related party transactions are associated with the probability of misstatement.  The fourth hypothesis relates to interaction terms.  Its first arm proposes an interactive effect, on the probability of misstatement, of multiple directorships and board independence.  The second arm postulates an interactive effect of multiple directorships and related party transactions (value and amount).

 

The hypotheses are tested via logistic regressions, estimated on a pooled basis.  The dependent variable is binary, flagging observations that were required to re-state earnings.  The independent variables are measured traditionally.  The final sample comprises a panel data set of 104 companies over the investigation period 2009-2015.  (i.e., there are 728 company-year observations.)

 

Table 6 reports the key results.  The coefficients of partner tenure are uniformly negative and significant (p<0.10), supporting the first hypothesis.  The coefficients of the dummy flagging companies with directors on multiple boards are insignificant, providing no support for the second hypothesis.  Similarly, the third hypothesis is not supported.  The first arm of the fourth hypothesis is not supported.  The second arm is supported.  While the interaction terms are significant (p<0.10), the signs of their coefficients differ, according to whether the number versus the value of related party transactions is used.  The authors interpret this differential effect as being due to the feature that in Chile, companies with fewer but larger related party transactions are likely to enter these transactions efficiently.

 

 

Critical review

The paper has sound academic and business motivation.

 

The arguments presented, related to the suitability of Chile’s institutional environment, are compelling, with some minor caveats.  The authors should delete discussion about institutional investors investing citizens’ superannuation contributions in listed companies.  This feature is not unique to Chile.  The argumentation that investors perceive board-related aspects of corporate governance to be of high quality are currently located in the section about sample selection and data collection.  This discussion should be relocated to the section covering relevant institutional features of Chile.

 

The current version presents the literature review and hypothesis development in the same section.  The authors should separate these two components, to enhance the paper’s understandability.  The literature review should discuss arguments and evidence, to support the opposing viewpoints, with respect to the corporate characteristics they investigate.  The hypothesis development section should present the authors’ synthesis, for each of these issues, regarding which (if either) viewpoint is stronger, in the Chilean context.

 

The hypothesis development is generally lucid and convincing.  I have one principal concern.  Separating the literature review and hypothesis development would improve the understandability of the paper.  With regard to the subject of each hypothesis, the literature review should present discussion and evidence, related to the opposing viewpoints.  The hypothesis development section should contain the authors’ synthesis as to which viewpoint is stronger, in the Chilean context.

 

I also have some minor concerns regarding the individual hypotheses.  Discussion of the distinction between audit partner tenure and audit firm tenure should be deleted from the development of H1.  This discussion is not critical and confuses the issue.  It seems that the expectation of a negative association, for H2, is more consistent with the arguments and evidence.  In the development of H4(b), the authors explain that in Chile, most cross-directors are independent and hence likely to increase the extent to which related party transactions are conducted efficiently versus opportunistically.  This consideration suggests that directional (negative) associations should be hypothesised, for the two arms of H4.

 

The research methodology is appropriate for testing the hypothesis.  I have one concern.  More emphasis should be placed on the analyses using accruals as a measure of earnings stability.  A suitable reference would be Burnett, Gordon, Jorgensen and Linthicum (2015).  The analyses currently in Table 4 of the paper should be deleted and replaced with the analyses currently reported in Table 6.

 

A strength of the paper is that the sample comprises nearly all of the population.    It seems that data were hand-collected, from the annual reports.  The authors should clarify.

 

The empirical analyses are executed rigorously and the interpretations are valid.  

 

 

Recommendation

I recommend that the authors be invited to revise and re-submit the paper to International Journal of Financial Studies.

 

 

Reference, not cited in the manuscript

Burnett, B., E. Gordon, B. Jorgensen and C. Linthicum, 2015, “Earnings Quality: Evidence from Canadian Firms’ Choice between IFRS and U.S. GAAP”, Accounting Perspectives 14 (3), 212-249.

 

Author Response

Please see attached file for point-by-point responses to Reviewer 3's comments.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Well done. Congrats!

Author Response

Hi, See the attached file for our responses. Sakthi

Author Response File: Author Response.pdf

Reviewer 2 Report

Thanks for the constructive responses. 

Now the paper is looking more organized than before.

Author Response

Hi, See the attached file for our responses. Sakthi

Author Response File: Author Response.pdf

Reviewer 3 Report

This report should be read in conjunction with the report I prepared, to assess the authors’ first submission of this paper.

 

 

Summary of the paper

The substance of the paper has not changed substantially.  Hence, I have decided to focus my report on the principal changes from the previous version. Naturally, this report also discusses my remaining concerns.

 

 

Critical review

In the section discussing relevant institutional features of Chile, the authors cover the practice of “multirutting”.  They should augment their discussion with a brief explanation of the importance of the practice, for their hypothesis development.  (e.g., it seems that multirutting increases the demand for disclosure about related party transactions, by trade unions.)

 

The authors have retained the structural feature of the previous version, containing the literature review and hypothesis development in the same section.  However, this section has been polished and now reads more coherently.

 

Regarding the research methodology - The authors have appropriately referenced Burnett, Gordon, Jorgensen and Linthicum (2015), to motivate their use of accruals as a measure of earnings quality.  The analyses in Table 4 now contain the models that include accruals as an independent variable.  It is appropriate that these models are presented with the principal results. 

 

I have concerns about Table 1, presenting univariate descriptive statistics.  This table is missing a header.  The maximum of %AFP exceeds 1.00.  This is meaningless is context.  A possible explanation is that in hand-collecting the data, there was some inadvertent double-counting.  A suggested solution would be to set this variable to 1.00, in cases where the calculated value exceeds 1.00.  The statistics show that the variable %AFP exhibits a right skew.  This finding warrants brief discussion.  (e.g., perhaps a minority of Chilean companies are subject to ownership by this type of institutional investor.  However, AFPs may have large ownership stakes in companies that they do invest in.)

 

 

Recommendation

I recommend that the authors be invited to revise and re-submit the paper to International Journal of Financial Studies.  Only minor revisions are required.  Hence, I do not need to review the next version.  If the editor is satisfied that residual concerns have been addressed, the paper will be ready for publication.

 

Author Response

Hi, See the attached file for our responses. Sakthi

Author Response File: Author Response.pdf