Aggressiveness in corporate financial and tax reporting:Do employee directors matter? A cross-country study

Abstract

We examine whether employee representation on a firm’s board of directors (ERB) has an impact on aggressiveness in corporate financial and tax reporting. Using an international sample of 3,450 firms across 29 countries over the period 2012–2021, we find that ERB firms practice less income-increasing accruals management, real-earnings management, and tax avoidance — consistent with a monitoring role for employee directors. Second, we present evidence that, at least for tax issues, this monitoring works even better when the board has desirable characteristics such as more independent directors, a single-mandate chief executive officer (CEO), and a majority shareholder. Third, we find that the monitoring effect is unaffected by the voluntary or law-imposed nature of ERB, but the useful interactions between the ERB effect and the desirable board characteristics are solely traced to the voluntary arrangements. Lastly, cross-sectional analyses show that younger, female, and employee directors without shares are typically better monitors.