The influence of CFO expertise on IFRS 15 disclosure quality and the moderating role of board oversight: a study of European listed construction companies

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Master’s Thesis, MSc Accountancy & Controlling,

track Accountancy

The influence of CFO expertise on IFRS

15 disclosure quality and the

moderating role of board oversight: a

study of European listed construction

companies

22

nd

_{of June 2020}

GUIDO DE GRAAF

S3204340

Supervisors:

R. van Duuren MSc

Prof. dr. R.L. ter Hoeven RA

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ABSTRACT

With the mandatory application of IFRS 15 – Revenue from Contracts with Customers as of January 1st_{2018, firms have to report more extensively on the recognition of revenues arising}

from long-term contracts. This paper aims to investigate the effect of CFO expertise on the quality of IFRS 15 disclosures, and examines the moderating role of board oversight, using board size, board gender diversity, board independence and CEO duality as attributes of board oversight. Contributing to the existing literature of disclosure quality and corporate governance I use agency theory, stakeholder theory and signaling theory as a foundation for developing the hypotheses. Using a unique self-developed disclosure index based on the disclosure requirements of IFRS 15, 37 European construction companies from the STOXX600 index have been investigated and rated manually over 2018 and 2019, resulting in a total sample of 63 firm-years. I find a significant positive relationship between CFO expertise and IFRS 15 disclosure quality, and show an MBA degree is most decisive in determining IFRS 15 disclosure quality. Furthermore, I provide evidence for two of the four attributes of board oversight having a significant moderating role in this relationship: board independence with a weakening role and CEO duality strengthening this relationship. This study provides valuable insights on IFRS 15 disclosure compliance in the construction sector, with examples of best practices and peer learning effects, and has important implications for theory and practice in defining the determinants of IFRS 15 disclosure quality and complying with this new standard.

Keywords: IFRS 15; revenue recognition; disclosure quality; CFO expertise; corporate governance; board oversight; board size; board gender diversity; board independence; CEO duality; agency theory; stakeholder theory; signaling theory; construction industry

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1. INTRODUCTION

With the divulgation of various accounting scandals, such as Enron, the need for more strict regulation regarding revenue recognition has increased attention (Schipper, Schrand, Shevlin, and Wilks, 2009; Wagenhofer, 2014). Since revenue is used as an important measure of a firm’s financial performance by investors and other stakeholders (Tong, 2014), firms often try to mislead the users of the financial statements by reporting fictitious revenue (Stubben, 2010). Fundamental deficiencies in preceding revenue recognition standards IAS 11 – Construction Contracts and IAS 18 – Revenue enabled firms to engage in these scandals (Wagenhofer, 2014). Within IAS 11 and IAS 18 the focus lied on a broad principle-based model, which was difficult to apply in complex contract situations (Wüstemann & Kierzek, 2005). Because of the current economic developments, which involve companies switching to more complex business models with more complicated contracts, previous accounting standards are not sufficient to provide the users of the financial statements with valuable information on revenue anymore (Aarab, Bissesur & Ter Hoeven, 2015). The International Accounting Standards Board (IASB) responded to these problems by creating IFRS 15, which became effective on January 1st 2018. The primary objective of IFRS 15 is giving more guidance to companies with complicated contracts and improving the comparability of revenues between different firms (Van der Kuij-Groenberg & Pronk, 2019). Under IFRS 15 firms need to disclose more information on revenue compared to the previous standards. Furthermore, the revenue recognition threshold is higher under IFRS 15, since revenue is allowed to be recognized only when it is highly probable that no significant reversal will take place (IASB, 2014). IFRS 15 mandates companies to report extensively on the accompanying judgments and estimates made on recognizing revenues from contracts (Pronk & Roozen, 2018).

The construction sector is an interesting field of research when it comes to IFRS 15, because of its complexity in revenue streams (Van Wyk & Coetsee, 2020). The dynamic nature, the length and the size of the projects make that the construction sector is considered as complex (PricewaterhouseCoopers South Africa, 2013). Ivory (2005) mentions the complex relationships involved in construction contracts. In addition, Mulder (2013) describes the dynamic environment of construction companies, due to strict deadlines and tight budgets caused by a high degree of competition. Van der Puil and Van Weele (2013) state that contracts become even more complex when construction companies operate in an international environment. Therefore this study focuses on the largest European construction companies from the STOXX600 index based on revenue. IFRS 15 gives more guidance to these complex contracts than previous standards. However, the more strict revenue recognition regulations also have disadvantages. Besides its influence on revenue, IFRS 15 impacts balance sheet items (Van der Kuij-Groenberg and Pronk, 2019). In 41% and 38% of the cases respectively, contract assets and contract liabilities are affected. The “costs to obtain a contract” item is impacted in 21% of the investigated cases. (Van der Kuij-Groenberg & Pronk, 2019). These balance sheet modifications have particularly important implications for construction companies, as balance sheet ratios are often included in

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6 financing covenants (Deloitte, 2016). The violation of covenants, (partly) caused by the application of IFRS 15, can result in less favorable financing terms for construction companies. Despite these reporting problems, disclosing more and more detailed information closes the information asymmetry gap between the company’s shareholders and its management (Brown & Hillegeist, 2007). According to the European Securities and Markets Authority (ESMA), the regulatory body that oversees the reporting about revenue recognition under IFRS 15, disclosure on accounting policies needs to be detailed, entity-specific and consistent with the information provided in the other parts of the annual report (ESMA, 2019). Construction companies reporting under IFRS 15 are required to follow a five-step model that determines the value of the contract and the amount of revenue that needs to be recognized (Pronk & Roozen, 2018). Within this model IFRS 15 mandates firms to disclose information on for instance the determination and satisfaction of performance obligations, and on judgment and estimates in determining the transaction price of the contract, including variable considerations (IASB, 2014). Furthermore, the ESMA (2019) provided enforcement priorities and hereby stressed the importance of additional disaggregation of revenue and qualitative explanations, as this facilitates the users of financial statements to gain a better understanding of the relationship between revenues and information from segment reporting.In this way, IFRS 15 disclosures help firms reducing agency problems within the construction industry with its complex contract structures (Jensen & Meckling, 1976).

Several researches investigated the role of CFO characteristics, particularly CFO expertise, and its association with financial reporting quality (e.g. Aier, Comprix, Gunlock, & Lee, 2005; Sun & Rakhman, 2013; Lewis, Walls, & Dowell, 2014). Drawing up the financial statements, which is among others concerned with the disclosure of IFRS 15 practices, is primarily under responsibility of the CFO (Caglio, Dossi & Stede, van der, 2018). CFOs often have a lot of specialized financial knowledge, which can be used to exercise their influence in establishing the financial reports of the firm (Mian, 2001). Within applying IFRS there is no cherry picking, which means that companies reporting under IFRS need to mandatorily apply IFRS 15 since January 1st 2018 (Pope & McLeay, 2011). With this new standard, the requirements of disclosing information about revenue are more comprehensive compared to its predecessors, IAS 11 and IAS 18 . This stresses the need for CFOs with high level financial expertise (Bralver, Harsh, & Schwartz, 2006). Bamber, Jiang and Wang (2010) ) found that, when looking at a firm’s external reporting and its decisions regarding disclosing financial information voluntarily, CFO expertise plays an important role. This research investigates the relationship between CFO expertise and IFRS 15 disclosure quality. I conceptualize CFO expertise through experience (tenure), education (master of business administration degree or MBA) and professional expertise (certified public account (CPA) or equivalent designation), following the approach of Sun and Rakhman (2013).

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7 Corporate governance is concerned with the processes, mechanisms and relations through which the company’s objectives are established and the procedures through which these objectives are achieved (OECD, 2004). Hilb (2012) suggests that when implemented and designed properly, board oversight attributes (as part of corporate governance) can be an assurance mechanism that builds stakeholders’ trust and effectively monitors managers. Board oversight therefore influences the power and freedom of CFOs, because their tasks are controlled by those attributes (Masli, Sherwood, & Srivastava, 2018). Berry, Fields and Wilkins (2006) identified different board oversight attributes that work together to bridge the information asymmetry gap and align the interests of executives and shareholders, and investigated the interaction among these variables. Examples of these board attributes used by Berry et al. (2006) are board size, board gender diversity and board independence. Tsui and Gul (2000) identified an additional board oversight attribute related to the level of freedom in which executives can fulfil their tasks: CEO duality. This paper includes the four abovementioned attributes of board oversight, since it is expected that these attributes influence the ability of the CFO to (voluntarily) disclose information (Haynes, Zattoni, Boyd, & Minichilli, 2019). In the case of the complex environment of the construction sector the implications of IFRS 15 on for instance financing covenants increase the demand for information about the amount, nature, timing and uncertainty of cash flows and revenues of shareholders and other stakeholders. This information includes for example judgments on accounting choices, which can be of benefit when making decisions based on the firm’s financial statements. With the complex contract structures of construction companies and the information demand of stakeholders it is important to produce high quality disclosures (Van der Kuij-Groenberg & Pronk, 2019). Proper board oversight creates an environment where CFOs are controlled, in order to encourage the CFO to disclose more and more detailed information about the recognition of revenue and close the information asymmetry gap between insiders and stakeholders (Jensen & Meckling, 1976). However, these board oversight attributes have not been studied as moderating variables yet. As board oversight has a key role in determining the environment of the CFO, I investigate the moderating effect of these board oversight attributes on the relation between CFO expertise and the quality of IFRS 15 disclosures and fill this void in literature. A unique feature is created by comparing different board types from different countries.

With the investigation of the new IFRS 15 standard and the use of a self-established disclosure index based on the disclosure requirements provided by the IASB (2014), this research features a unique setting within the literature of disclosure quality. Because the CFO’s reporting freedom is determined by board oversight attributes, and the absence of the moderating role of these attributes in literature, I investigate this moderating effect on the relationship between CFO expertise and IFRS 15 disclosure quality. Therefore, my research question is:

What is the influence of CFO expertise on the quality of IFRS 15 disclosures, and what is the moderating role of board oversight in this relationship?

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8 Investigating 63 annual reports over the years 2018 and 2019 of 37 European construction companies from the STOXX600 index this study provides evidence for a significant positive relationship between CFO expertise and IFRS 15 disclosure quality. In addition, the moderating roles of board independence and CEO duality prove to be significant.

The latter of this paper is structured as follows. In the next section, the academic and societal contribution is discussed. Thereafter, background of the subject of this study is further explained based on the existing literature. Moreover, the hypotheses are developed based on the independent and moderating variables, CFO expertise and board oversight. Furthermore, the disclosure index as well as the sample are described using descriptive statistics. After the results of the regressions and robustness tests have been discussed, this paper ends with the theoretical and practical implications, limitations and a conclusion.

2. ACADEMIC AND SOCIETAL CONTRIBUTION

This research contributes to existing literature and practice in multiple ways. First, it builds upon existing literature of agency and stakeholder theory. Since agency theory is concerned with information asymmetry between the owner of the company (principal) and the CFO (agent), the outcomes of this research could be of importance to companies that experience this gap (Eisenhardt, 1989). Agency theory is used to describe the relations between executives and the owners of the company, and forms the basis of this research. This research also contributes to stakeholder theory, which states that the use of financial statements is not only limited to shareholders (Freeman, 1984). Stakeholders, which have a claim in the company (Freeman, 1984), can become better informed and thus make better decisions through higher quality IFRS 15 disclosures.

Second, this research contributes to theory about IFRS 15. Basically, IFRS 15 is a mandatory standard for the European listed construction companies investigated in this research. However, as IFRS 15 is a new standard, the way in which firms give substance to the new disclosure requirements is different. Furthermore, firms can choose to provide the users of the financial statements with additional firm-specific or project-specific information. This research looks at the differences among firms by distinguishing best practices and peer learning effects. Moreover, this study provides a test of compliance regarding IFRS 15. Since IFRS 15 became effective on January 1st 2018, there is little existing literature that investigates compliance with IFRS 15. This study investigates the quality of IFRS 15 disclosures and whether firms comply with the standard. The unique setting that is created, with a self-established disclosure quality index based on the requirements of IFRS 15, contributes to measuring the quality of disclosures.

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9 Third, this research builds upon earlier research done by among others Aier et al. (2015) and Sun and Rakhman (2013). Both researches investigated CFO expertise as a determinant of disclosure quality and voluntary disclosure (Aier et al., 2005; Sun & Rakhman, 2013). This research looks at CFO expertise and its relationship with disclosure quality in the context of IFRS 15. As this study investigates companies from different countries, with different board structures, this research features a unique setting in disclosure and corporate governance research.

Fourth, firms facing difficulties with the application of IFRS 15 and disclosing information concerning revenue recognition can use the outcomes of this research to improve their reporting quality. High quality IFRS 15 disclosures are important, because revenue is one of the most used benchmarks in assessing firm performance (Tong, 2014). The way in which CFO expertise and board oversight attributes cooperate to improve IFRS 15 disclosures can be of importance for those firms. Moreover, standard setters as the IASB and regulatory bodies as the ESMA can gain insights on the determinants of IFRS 15 disclosure quality. In its review of disclosures in the first year of application, the Financial Reporting Council (FRC) finds the disclosures about variable consideration and variations in contracts disappointing (FRC, 2019). Furthermore, the ESMA reported 23 enforcement actions on 2019 financial statements against issuers (ESMA, 2020). The outcomes of this study are of particular importance for those organizations, since these insights can be used to take action and ensure compliance regarding this new standard. When firms do not comply with these new regulations, it will become less complicated for those supervising organizations to steer towards compliancy. In addition, the self-established disclosure quality index of this research can be used by the ESMA as a robustness test on their own findings.

3. DEFINITIONS

This section provides additional background information on two important topics. First, an explanation of the IFRS 15 standard is provided. Secondly, the different board types in Europe are discussed and I explain my approach on dealing with these differences in corporate boards.

3.1. IFRS 15 Content

Following the release of Regulation (EC) NO 1606/2002 by the European Commission in 2002 all listed companies in the European Union are mandated to apply IFRS in establishing its financial statements for the fiscal years beginning on or after January 1st 2005. Furthermore, companies subject to IFRS cannot apply these standards with exceptions: cherry picking is not allowed (Pope & McLeay, 2011). This means that all publicly traded companies in the European Union have to apply the entire set of standards provided by the IASB, including IFRS 15 as from January 1st 2018. With the issuance of IFRS 15, the IASB replaced former standards IAS 11 – Construction Contracts and IAS 18 – Revenue as well as standards IFRIC 13, 15 and 18 and

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SIC-10 31. The objective of the new IFRS 15 standard is to enable the users of the financial statements to understand the amount, nature, timing and uncertainty of cash flows and revenue from contracts with customers (IASB, 2014). Since the mandatory application of IFRS 15 for all European listed companies that have contracts with customers, a lot has changed when it comes to revenue recognition. One of the most important changes resulting from IFRS 15 respective to the superseded standards is the timing of revenue recognition. With IFRS 15 revenue is only allowed to be recognized when it is highly probable that no significant reversal will take place (IASB, 2014). The accompanying judgment of this highly probable criterium needs to be explained thoroughly. Where former standards require firms to recognize revenue based on risk and reward, IFRS 15 looks at the control of the identified performance obligations (Aarab et al., 2015). Furthermore, IFRS 15 gives more detailed guidelines for variable revenue streams, combining contracts, amendments to contracts and processing contracts with multiple performance obligations (Van der Kuij-Groenberg & Pronk, 2019). The choices made on these aspects require firms to apply professional judgment. Firms are expected to provide stakeholders with higher quality disclosures, as these detailed guidelines require firms to give more insights in the recognition of revenue from contracts (Pronk and Roozen, 2018). IFRS 15 is structured as a five-step model that indicates whether and when a firm needs to recognize revenue with the amount that can reasonably be expected (Deloitte, 2016). Firms are required to disclose information about contracts with customers, significant judgments and changes made to those contracts (IASB, 2014). The five-step model and the features of IFRS 15 are described in Appendix A.

Although IFRS 15 is mandatory standard with requirements that need to be followed, differences exist in level of detail and depth of the disclosures. Companies can provide stakeholders with additional voluntary information by disclosing firm-specific or project-specific implications of IFRS 15 (de La Bruslerie & Gabteni, 2012). In this way firms respond to the information asymmetry that comes along with agency relations (Eisenhardt, 1989). Because IFRS 15 is a relatively new standard firms are trying to find their way to give substance to the disclosure requirements. This study investigates IFRS 15 disclosures of 2018 and 2019, therefore, best practices and peer learning effects are identified.

3.2. Corporate Boards in Europe: similarities and differences

The structure of boards adopted by companies differs between countries. As this research includes companies from Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden and the UK, it is important to discuss differences and similarities among the different board types in these countries. There are mainly three types of corporate board structures in Europe: 1) one-tier boards, 2) two-tier boards and 3) Nordic boards (IFC, 2015).

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11 Under an Anglo-Saxon regime, such as the UK and Ireland, it is more likely that companies adopt a one-tier or unitary board model in which the directors and the management jointly form the board (Choudhuri, 2017). A unitary board contains both executive directors and non-executive directors and its responsibility covers all facets of the firm’s operations. It is the duty of all directors to ensure the well-being and success of the firm (IFC, 2015).

In countries with a civil law orientation, however, a two-tier board structure is more commonly adopted. Examples of these countries are Germany and the Netherlands (Choudhuri, 2017). In two-tier board models, executive and non-executive directors are separated into the management board and the supervisory board (IFC, 2015). The management board, with its inside executive directors, is responsible for the day-to-day operations, while the supervisory board, consisting of outside directors, supervises whether the management board acts in the same interests as the shareholders (Choudhuri, 2017). Supervisory board members are appointed by the shareholders (employee representatives excluded) and the management board is appointed by the supervisory board (IFC, 2015). Based on a comparative analysis Choudhuri (2017) argues that the duties and responsibilities of non-executive directors and directors on the supervisory board are similar, as both types of directors are charged with supervising and monitoring executive management. In other countries, such as Spain, Portugal and Belgium, companies are allowed to choose between one-tier and two-tier board models (Choudhuri, 2017). French firms also have the possibility to choose between the two models, but they are offered a third option to choose from in which multiple organs have supervision over the management board (Hopt & Leyens, 2004). In this research, such a board structure is considered as a two-tier board model.

Basically it is possible for CEOs to also hold the chair position of the board in a one-tier board system, as opposed to two-tier board models, where CEO duality is not admitted (Choudhuri, 2017). However, some countries applying a two-tier board model allow management board directors to have a seat on the supervisory board. Examples of these countries are Italy, Belgium and Sweden (Millet‐Reyes & Zhao, 2010).

In Scandinavian countries a Nordic board model is most common. This board model is characterized by the relatively small size, a high proportion of independent directors, the right to have employee representatives on the board (except for Finland) and a strict separation between CEO and chairman (IFC, 2015). Shareholder representatives are elected by the shareholders, who have the opportunity to elect a high proportion of shareholder representatives in order to decrease the proportion of employee representatives (Thomson, Rose, & Kronborg, 2016). Shareholder representatives can be seen as more independent compared to employee representatives, because employee representative do not necessarily behave in the interests of the firm and its shareholders (Thomson et al., 2016). In this study a Nordic board model is considered as a two-tier board, because of the strict separation between executive management and the board (IFC, 2015) Appendix B provides an overview of the different board types adopted by the companies investigated in this research.

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12 Since this research focuses on the impact of the monitoring role of the board, only non-executive directors and directors from the supervisory board will be considered in the measurement of board oversight attributes. Notwithstanding the differences between the two board types and monitoring bodies, Choudhuri (2017) states that neither of the board types has the best performance. This corresponds with the study of Jungmann (2016), who state that it is impossible to distinguish the board types in terms of superiority. Therefore I do not control for board type in the analyses.

4. THEORETICAL BACKGROUND

This section provides the foundation of this research, in which the most relevant theories underlying this study are discussed. An introduction of agency theory, stakeholder theory and signaling theory is given, on which I further elaborate in chapter 5 to develop the hypotheses.

4.1. Agency Theory and Corporate Governance

Agency theory is a widely studied phenomenon that can be seen as one of the key theories in financial accounting and other literature in the field of economics and business (Eisenhardt, 1989). Jensen and Meckling (1976) state that the agency relationship can be seen as a contract between the principals (owners) and the agents (managers) under which the agents are engaged by the principals to perform specific tasks on their behalf. Agency theory states that there is information asymmetry between managers and owners of a company because managers have better access to information than the owners of a firm (Jensen & Meckling, 1976). Another proposition of agency theory is that interests of executives and owners diverge (Jensen & Meckling, 1976; Eisenhardt, 1989). When given the opportunity executives will engage in self-serving actions that are conflicting with the goals of the shareholders (Jensen & Meckling, 1976). Disclosing information voluntarily is a way to mitigate the risks in an agency relationship, because shareholders receive more information (Barako, Hancock, & Izan, 2006). By disclosing relevant and accurate information on a timely basis, shareholders are able to efficiently observe and evaluate the performance of top management (Madhani, 2015). Voluntary disclosure by managers is also used to convince other stakeholders of their optimal behavior (Watson, Shrives, & Marston, 2002). Brown and Hillegeist (2007) found a negative association between information asymmetry and disclosure quality. Their results indicate that higher quality disclosures decrease the frequency of private information events, because shareholders’ incentives to find this information are reduced by higher quality reports (Brown & Hillegeist, 2007). This suggests that shareholders and stakeholders are more informed about the firm when the firm’s disclosures are of higher quality. Proper corporate governance mechanisms that supervise executive management can limit the divergence between the interests of executives and owners by monitoring the executives and preventing the executives from behaving opportunistically (Hill & Jones, 1992). In the case of construction companies with complex

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13 relationships involved in contracts (Ivory, 2005; Mulder, 2013), it is even more important for shareholders to have extensive information to consider their investment decisions. The comprehensive information on revenue recognition and the explanation on judgments and estimates that is required by IFRS 15 therefore contributes to closing the information asymmetry gap between the managers and owners (Jensen & Meckling, 1976). Kwak, Ro and Suk (2012) argue that the body charged with governance over executive management plays a key role in stimulating this information provision. In this way agency theory contributes to the quality of disclosures.

4.2. Stakeholder Theory and Legitimacy Theory

Where agency theory merely focuses on the interests of shareholders, stakeholder theory looks at it from a broader perspective. According to Freeman (1984), the founding father of the stakeholder theory, stakeholders are people or organizations that have a legitimate claim on the firm. This legitimacy is based on a reciprocal relationship between stakeholders and the company. Stakeholders include among others managers, employees, shareholders, suppliers, banks, customers and the society (Freeman, 1984). Those groups can be seen as contributors to the firm and they want something in return for their contributions (March & Simon, 1958). This view deviates from agency theory, as agency theory merely focuses on stockholders who want the firm to maximize its value in exchange for the capital they provide (Jensen & Meckling, 1976). Stakeholder theory, however, suggests that the ones that are influenced by the firm’s decisions need to be satisfied by managers (Freeman, 2010). According to Chiu and Wang (2015), this should be done by balancing conflicts among stakeholders and handling their demands. Disclosure is a powerful tool to provide stakeholders with information about the firm and thus meeting them in their demand for information (Healy & Palepu, 2001). Key stakeholder groups involved in the complicated construction contracts are clients, contractors and consultants (Doloi, 2013), as well as creditors such as banks (Deloitte, 2016). The requirements of revenue recognition disclosure under IFRS 15 urge construction companies to disclose more information, especially on the judgments involved in accounting choices regarding contracts (Van der Kuij-Groenberg & Pronk, 2019). With this additional information stakeholders are better able to determine the firm’s viability (Van Wyk & Coetsee, 2020) and thus benefit from the more extensive reporting on revenue recognition.

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4.3. Signaling Theory

Signaling theory is the field of research that is concerned with addressing the information asymmetry gap from agency theory between two parties, by disclosing more information (Spence, 2002). Investors’ and other stakeholders’ need of information through mandatory disclosure is not usually met by laws and regulations (Graham, Harvey, & Rajgopal, 2005). Since only a minimum level of information that is needed to make decisions is provided by mandatory disclosures (Al-Razeen & Karbhari, 2004), the demand for disclosing information voluntarily increases (Shehata, 2014). Zhang and Wiersema (2009) show that CFOs use quality of financial statements as a channel to signal the unobservable quality to potential investors of the firm. Firms can use their own judgment to give substance to the disclosure requirements of IFRS 15 and decide what topics need to be highlighted more thoroughly. With the provision of additional information, for example on disaggregation of revenue and using project-specific explanations on judgments and estimates made, firms can distinguish themselves from competitors and give a signal to outsiders on their good performance (Connelly, Certo, Ireland, & Reutzel, 2011).

5. HYPOTHESIS DEVELOPMENT

In this section hypotheses are developed based on the theories in the previous section, starting with the independent variable: CFO expertise. Thereafter, de moderating variable, board oversight, is described. This variable is divided into four board oversight attributes, which are all treated separately in the development and testing of the hypotheses.

5.1. CFO expertise

The CFO is the one who is responsible for all financial functions of a company, including the internal control system (Aier et al., 2005). Another important responsibility of CFOs is to interact with investors and bankers. Because of these relationships CFOs are able to exercise influence on many different environments (Aier et al., 2005). Moreover, CFOs are ultimately responsible for compiling the financial statements, as the finance and accounting department report to the CFO (Caglio et al., 2018). With specialized financial knowledge and a position with direct supervision over senior finance managers, CFOs are able to steer the reporting processes and influence the judgments made on accounting decisions (Mian, 2001). Therefore, CFOs are considered as the guardians for financial reporting quality (Feng, Ge, Luo, & Shevlin, 2011). When it comes to IFRS 15 disclosures, the CFO is ultimately responsible for the information disclosed in the annual reports. As mentioned in the introduction, I investigate the role of CFO expertise on IFRS 15 disclosure quality and measure CFO expertise through a proxy of tenure, level of education in business, and the level of professional education in accounting, following Sun & Rakhman (2013).

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15 Tenure is considered as an important demographic factor due to its relatedness with the process of cognitive decision making (Kim & Yang, 2014). Ali and Zhang (2015) found that executives in the beginning of their term tend to focus more on financial results instead of improving disclosure quality. Xiong (2016) states that more tenured CFOs have a better understanding of policies and therefore are better able to make complex accounting choices and reflect on their judgment. Reporting choices of more tenured CFOs therefore deviate from less tenured CFOs. In the paper of Sun and Rakhman (2013) with the investigation of the relationship between CFO expertise and CSR reporting quality, tenure plays an especially important role in voluntary reporting. More tenured CFOs tend to disclose more information voluntarily, because they care more about stakeholders (Sun & Rakhman, 2013). In the case of the construction sector, they respond to stakeholders’ demand of more information about revenue recognition and the judgments made in their accounting choices. In sum, CFOs with longer tenure tend to disclose more information instead of only focusing on financial results (Ali & Zhang, 2015), and they report more about voluntary non-financial information (Sun & Rakhman, 2013). In the case of IFRS 15 this means that CFOs with longer tenure are expected to disclose more detailed information about revenue recognition and more contextual explanations on judgments and accounting choices.

Aier et al. (2005) and Sun and Rakhman (2013) looked at whether CFOs holds a CPA (or equivalent) degree and used it as a proxy for expertise on financial subjects. In order to obtain a CPA degree, a thorough understanding of auditing, accounting and financial reporting is necessary, which reflects the level of financial expertise. Processing raw information into financial disclosures is easier for CFOs with such a professional education background and with this feature CFOs with a CPA degree are better able to use their judgment when it comes to disclosing financial information (Ge, Matsumoto, & Zhang, 2011). As IFRS 15 requires construction companies to report extensively on judgments and estimates made on the recognition of revenue from contracts (Pronk & Roozen, 2018), CFOs with a CPA degree are better able to assess the information that is supposed to be disclosed (Ge et al., 2011). Therefore, IFRS 15 disclosure quality is expected to be higher when a CFO holds a CPA certification. Aier et al. (2005) investigated the role of CFO characteristics in 228 cases of earnings management over the period 1997 to 2002 and found that CFOs with a CPA degree are less likely to manage earnings. As earnings management is related to disclosure quality, because lower quality disclosures enable CFOs to engage in earnings management (Shalev, 2009), CFOs with a CPA degree are associated with higher quality disclosures (Aier et al., 2005). Level of education is considered as an important determinant in ethical dilemmas (Zahra, Priem, & Rasheed, 2007). This is particularly the case when it comes to CPA qualifications, since professional ethics is highly emphasized within CPA studies (Ge et al., 2011). CFOs with a CPA qualification are therefore more responsible for their actions because they tend to pay more attention to what is morally right or wrong (Zahra et al., 2011). Agency theory and stakeholder theory suggest that CFOs should disclose more and higher quality information to close the information asymmetry gap between executives and stakeholders (Jensen & Meckling, 1976; Freeman, 2010). As CFOs

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16 with a CPA degree are more ethically concerned, they tend to better respond to the information needs of stakeholders compared to CFOs (Zahra et al., 2011). In the case of IFRS 15 this means that CFOs with a CPA degree disclose more information about the recognition of revenue to enable stakeholders make better decisions.

Whether CFOs hold a master’s degree in business administration (MBA) is another measure of knowledge regarding financial information. According to Wier, Stone and Hunto (2005) the possession of an MBA is an important determinant in the future success of financial professionals. They investigated 2,525 managerial accountants from firms in North America and found that MBA graduates got better job evaluations (which include their performance on financial reporting) than their peers without such education. Lewis et al. (2014) show that CFOs with an MBA disclose more information voluntarily, resulting in higher disclosure quality. Ran, Fang, Luo, and Chan (2015) agree with the previous statement and show that accounting information quality is positively related with an MBA in the context of supervisors. This can be ascribed to the fact that an MBA not merely offers education on financial subjects like CPA education does, but also covers general business issues. Therefore MBA graduates are able to understand organizations more thoroughly than professionals without an MBA degree, they are putting financial information in a broader context and thus report more in detail (Sun, Johnson, & Rahman, 2015). With this information I expect CFOs with an MBA degree are better able to oversee the implications of additional disclosure on revenue recognition, because CFOs have to deal with complex contract structures that can be better evaluated by MBA CFOs (Sun et al., 2015). De Almeida and Lemes (2019) confirm previous statements and show that CFO educational background as well as CFO tenure play a key role in determining accounting choices and disclosure quality in the application of IFRS. As education reflects the necessary knowledge in order to tackle complex business problems and tenure is associated with more focus on stakeholders (De Almeida & Lemes, 2019), CFOs with more expertise tend to disclose more information. These findings are robust for country differences, since firms from Brazil were included in the sample. When linking this to IFRS 15 disclosures, it can be argued that CFOs with higher education and a professional degree report more extensively and therefore the quality of disclosures is higher compared to CFOs without a professional degree.

Based on the above arguments, presenting that CFOs with more expertise - represented by a longer tenure and a higher level of educational background in both business and accounting - have better reporting skills, resulting in higher quality disclosures, I argue that CFO expertise is positively associated with IFRS 15 disclosure quality. Therefore, I hypothesize:

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5.2. The moderating effect of board oversight

The existing corporate governance literature focuses mainly on how corporate governance characteristics hinder top executives from behaving in their own interests (Aguilera, Desender, Bednar, & Lee,2015). As agency theory states, executive management has more information about the firm than the owners (Jensen & Meckling, 1976). Therefore they are able to extract private benefits from the firm without shareholders being aware of it (Aguilera et al., 2015). The monitoring function of the board plays a key role in preventing managers from this behavior, and tends to align the interests of executive management with shareholders. As the provision of information is an important issue in agency theory, due to information asymmetry between executives and owners, boards force managers to disclose more and higher quality information (Jensen & Meckling, 1976).

The extent to which CFOs can use their power to make particular reporting decisions is determined by the way they are monitored by supervising directors (Haynes et al., 2019). Misangyi & Acharya (2014) found that the effectiveness of board oversight attributes that monitor the CFO depend on how the mechanisms are combined with each other. Companies with stronger monitoring mechanisms are more successful in decreasing information asymmetry between shareholders and management by disclosing more information (Kwak et al., 2012). In this way, the likelihood of voluntarily disclosing information is increased as well as the quality of mandatory disclosures (Sengupta & Zhang, 2015). When board oversight attributes are stronger, the ability of monitoring the CFO is better (Kent & Stewart, 2008). As IFRS 15 is a new standard and firms in the construction sector are struggling to give substance to the more sophisticated disclosure requirements on revenue from contracts (Van der Kuij-Groenberg & Pronk, 2019), the monitoring function of the board enables CFOs to improve the disclosure quality of IFRS 15. To conclude, and forthcoming from agency theory, I argue that board oversight attributes have a positive moderating effect on the positive relationship between CFO expertise and IFRS 15 disclosure quality. Board oversight is conceptualized using four key board oversight attributes: board size, board gender diversity, board independence and CEO duality.

5.2.1. Board size

One of the mechanisms that oversees and interacts with the CFO on a regular basis in order to decrease financial risks is the board (McNulty, Florackis, & Omrod, 2013). Cheng (2008) investigated the amount of directors on the board and its relationship with corporate performance, based on the differences in discussing issues and making strategic decisions. Because a board with more directors needs to take more compromises in reaching unanimity, the decisions made are well-considered and less extreme, resulting in lower variability in corporate performance (Cheng, 2008). However, literature also shows a negative effect of larger boards due to the necessary attunements for reaching unanimity (Cheng, 2008). How this relates to disclosure quality is shown in the research of Kent and Stewart (2008). They investigated the monitoring

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18 role of board size on disclosure quality of IFRS in Australia and found that a larger board is positively related with higher disclosure quality. Husted and De Sousa-Filho (2019) found that boards with more directors disclose more information voluntarily. They investigated boards of Latin American firms and their relation with corporate social responsibility disclosure. According to Husted and De Sousa-Filho (2019) board size is positively associated with the quality of disclosures, because larger boards tend to base their decisions on a broader context of subjects, with more room for discussions. CFOs with more expertise are better able to translate the desires of a larger board to take these different contexts into consideration (De Almeida & Lemes, 2019). Even in Latin American countries, where shareholders are considered more important than other stakeholders in the provision of information (Freeman, 2010), larger executive boards tend to disclose more information voluntarily in order to meet the information needs of other stakeholders (Husted & De Sousa-Filho, 2019). More monitoring directors or directors on the supervisory stakeholders in their demand for high quality disclosures regarding revenue recognition (Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012). Combining this with IFRS 15 disclosures from European listed companies, it is likely that larger boards disclose more and more detailed information on revenue recognition due to more discussion and compromises in reaching consensus, and a broader look on issues that have to be considered (e.g. on judgment on accounting choices). Because Europe is even more stakeholder oriented than Latin America (Dhaliwal et al., 2012) it is likely that large boards have a strengthening effect on providing information.

Based on the above arguments, presenting that larger boards have better monitoring power due to more discussions looking at issues from a broader perspective, I argue that board size has a strengthening effect on the positive relationship between CFO expertise and IFRS 15 disclosure quality. Therefore, I hypothesize:

Hypothesis 2a. Board size strengthens the positive relationship between CFO expertise and IFRS 15 disclosure quality

5.2.2. Board gender diversity

The discussion of women on corporate boards is more relevant than ever. The global average percentage of women on corporate boards is 16.9% in 2018, compared to 15.0% in 2016 (Deloitte, 2019). Although this proportion is increasing, it does not correspond with the proportion of all male and female. Women on boards are associated with positive characteristics which make these figures even more surprising. In their study investigating the role of women from more than 100 executive boards using narrative methods, Huse and Solberg (2006) found that women are more committed to their role on boards compared to men. They found that women’s decision-making process not merely takes place within meetings but also outside the board room. Adams and Ferreira (2009) found that women put more emphasize on monitoring than their male counterparts, especially as non-independent directors or directors on the

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19 supervisory board. Moreover, Nielsen and Huse (2010) found that women bring different perspectives to the board room, due to their broader point of view on relevant board issues. Therefore, women tend to be better prepared for meetings and thus are more likely to make better decisions than men (Nielsen & Huse, 2010). Because women have better abilities regarding communication, risk management and multi-tasking, more gender diverse boards are more likely to have better monitoring capabilities over executive management (Schubert, 2006). Moreover, women have different professional profiles due to other career aspirations, which result in more overall diversity in gender diverse boards (Barbulescu & Bidwell, 2013). Because of this the board is better able to supervise the CFO and the accounting and disclosure choices that have been made.

In a study investigating the differences between men and women in top management and director positions in Finnish companies and their link with voluntary disclosure, Nalikka (2009) found that firms with more women in such positions are associated with higher disclosure quality. Abdullah and Ku Ismail (2013) state that the presence of women on boards results in more informativeness of reported accounting numbers. They investigated Malaysian firms and found that women tend to focus more on social aspects such as disclosing information, compared to financial performance. According to Stephenson (2004) female directors pay more attention to monitoring and auditing the executive board due to their point of view on risk. Women are more adverse towards risk and more empathic towards stakeholders (Stephenson, 2004) and therefore they encourage the provision of more and higher quality information to those stakeholders who are influenced by the firm’s operations (Freeman, 2010). Furthermore, Joy (2008) argues that board gender diversity enhances communication towards investors in the US. Because Europe is more stakeholder oriented (Dhaliwal et al., 2012), it is likely that board gender diversity has an even more strengthening effect on the sample in this research. Brown and Hillegeist (2007) report similar results with their findings of a negative relation between information asymmetry and women on boards, suggesting that monitoring boards with a higher percentage of women encourage executives to disclose information voluntarily. More gender diverse boards improve the quality of disclosures on complex contracts and revenue recognition under IFRS 15, because they want to meet stakeholders in their demand for information (Freeman, 2010). A higher proportion of woman on boards improves the quality of disclosures, due to better monitoring and more focus on stakeholder communication.

Based on the above arguments, presenting that more gender diverse boards have better monitoring power as well as better communication capabilities towards stakeholders, I argue that board gender diversity has a strengthening effect on the relationship between CFO expertise and IFRS 15 disclosure quality. Therefore, I hypothesize:

Hypothesis 2b. Board gender diversity strengthens the positive relationship between CFO expertise and IFRS 15 disclosure quality

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20 5.2.3. Board independence

According to Fama and Jensen (1983), board independence is an effective measure that helps to protect shareholders from executives engaging in self-serving behavior. In this way monitoring executives’ behavior is better performed and incentives ensure that executives behave in the interests of shareholders (Fama & Jensen, 1983). The primary function of independent directors is to supervise the board from a principal-agent perspective (Jensen & Meckling, 1976). When it comes to corporate governance effectiveness independent directors are regarded as key contributors, because they are the intermediaries between the owners and inside directors (Madhani, 2015). In a meta-analysis of board effectiveness Iwu-Egwuonwu & Chibuike (2010) argue that the literature is consistent with the proposition that the proportion of independent directors on boards is positively associated with the firm’s governance. Independent directors have no responsibilities to the firm except for their board role, and therefore they can intervene when CFOs are not behaving in the interests of the owners (Post, Rahman, & Rubow, 2011). In this way independent directors represent the vote of the shareholders and other stakeholders in the board room. In order to decrease information asymmetry and agency problems, shareholders and other stakeholders demand transparency when it comes to the financial statements, and in this case the IFRS 15 disclosures (Jensen & Meckling, 1976; Freeman, 2010). Since independent directors are the intermediaries between the owners and inside directors, it is likely that boards with a higher proportion if independent directors encourage CFOs to disclose more and more detailed information. Furthermore, García-Meca and Sanchez-Ballesta (2010) found a positive relation between the number of independent directors on the board and voluntary disclosures. Huafang and Jiangua (2007) also found that more independent boards are associated with higher quality disclosures. Therefore, it is likely that boards with a higher proportion of independent directors encourage CFOs to disclose more firm-specific or project-specific information regarding revenue recognition under IFRS 15.

Based on the above arguments, presenting that board independence results in better representing shareholders’ and other stakeholders’ votes, better CFO monitoring and that more independent boards encourage CFOs to disclose more and more detailed information, I argue that board independence has a strengthening effect on the relationship between CFO expertise and IFRS 15 disclosure quality. Therefore, I hypothesize:

Hypothesis 2c. Board independence strengthens the positive relationship between CFO expertise and IFRS 15 disclosure quality

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21 5.2.4. CEO duality

Finkelstein and D’Aveni (1994) argue that further improved governance is ensured by situations in which CEOs are not chairman of the board. CEOs who also hold the chair position on the board have more power and therefore the board’s ability to effectively monitor the CEO could erode (Tsui & Gul, 2000). A conflict of interest exists when the CEO also holds the position of chairman on the board, because the level of board oversight is decreased which results in a weakening ability to maximize financial returns on investments (Nicholson & Kiel, 2007). The influence of CEO duality is not only felt by shareholders or other outside stakeholders. CFOs, who are responsible for all financial functions, have responsibility towards the CEO (Mian, 2001). The power that comes with the subordination of CFOs to CEOs who also hold the chair position on the board, can be used by CEOs to create pressure on CFOs to manipulate the financial statements or hide negative disclosures (Feng et al., 2011). Feng et al. (2011) studied the relation between CEOs and CFOs in a setting comparing firms in the US that manipulated its financial statements versus firms that did not. They found that CEOs of companies that manipulate financial statements have more power compared to CEOs of non-manipulating companies (Feng et al., 2011). In addition, Friedman (2014) found that CEOs who have more power cause lower quality financial reports. Power in this case means the ability of the CEO to force the CFO to exercise bias in drawing up the financial statements (Friedman, 2014). This kind of power is increased when the CEO also holds the position of chairman on the board (Nicholson & Kiel, 2007). These arguments suggest a weakening role of CEO duality on the positive relationship between CFO expertise and IFRS 15 disclosure quality.

However, when CFOs have little expertise they intend to easily succumb to the pressure of a dual CEO to negatively affect the quality of IFRS 15 (Aier et al., 2005).When CFOs have a lot of expertise, they are better able to withstand the urge of being influenced by powerful CEOs because of their ability to apply the skills and experience they possess (Aier et al., 2005). Due to this expertise of CFOs, CEO duality does not necessarily result in lower quality disclosures, because CFOs with plenty of expertise are able to mitigate the risk of negatively affecting IFRS 15 disclosure quality.

Based on the above arguments, I predict that CEO duality has a weakening or strengthening effect on the relationship between CFO expertise and IFRS 15 disclosure quality. Therefore, I hypothesize:

Hypothesis 2da. CEO duality weakens the positive relationship between CFO expertise and IFRS 15 disclosure quality

Hypothesis 2db. CEO duality strengthens the positive relationship between CFO expertise and IFRS 15 disclosure quality

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6. RESEARCH METHODOLOGY

In this section I explain the methodology that is used to conduct this research. First I describe the criteria and choices that have been made to obtain the sample. Moreover, I explain the measurement of the dependent variable, disclosure quality of IFRS 15. Furthermore, I describe the measurement of the independent and moderating variables. Lastly, adjustments of the original data are discussed.

6.1. Data collection and sample

The initial sample used for this research contained the 30 largest European construction companies from the STOXX600 index. Since European listed construction companies are mandated by Regulation (EC) NO 1606/2002 to apply IFRS, these companies are highly suitable for this research, in contrast to most US firms which apply US GAAP. As IFRS 15 became effective on January 1st_{2018, only annual reports of fiscal years 2018 and 2019 were useful. The} researched companies were selected from the Orbis Company Database based on total revenue. Since this research project is conducted in the Netherlands, with Dutch researchers and supervisors, the next two largest Dutch listed construction companies were added to create a more relevant sample. With the integration of Heijmans and Boskalis the new sample contained 32 firms equaling 64 annual reports. In order to have a sufficient sample size financial statements not yet available were replaced by the next five largest construction companies for which the financial statements over 2018 and 2019 were available. This led to a final sample of 63 firm years.

6.2. Dependent variable: disclosure quality of IFRS 15

The dependent variable, disclosure quality of IFRS 15, is measured by a self-developed disclosure index. This model is designed to measure the quality of the company’s disclosure based on the disclosure requirements of IFRS 15 (IASB, 2014). These disclosure requirements have been followed closely in the establishment of the disclosure index. This disclosure index has been critically evaluated by accountants from practice, with plenty of IFRS 15 knowledge. Therefore, this disclosure index is reliable in measuring IFRS 15 disclosure quality. When a firm complies with the requirements in the standard, basically a score of 1 is assigned to that paragraph. However, differences in depth and level of detail can exist between disclosures. Companies can disclose additional voluntary information on IFRS 15 to give insights on firm-specific or project-firm-specific developments, which is rewarded with 2 points. Furthermore, firms are struggling to give substance to these disclosures as IFRS 15 is a relatively new standard. Therefore, disclosure scores from different companies deviate, although IFRS 15 is mandatory.

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23 For example, when looking at the requirements for paragraph 114 and 115 of the disclosure index in Appendix C, there is some overlap with IFRS 8. When only the requirements of IFRS 8 are disclosed and no additional information is provided, a score of 0 is given. When revenue is disaggregated not only by operating segments (IFRS 8), the firm scores 1 point. In case of providing additional project-specific or firm-specific information and disaggregation based on contract duration, type of market or type of customer, the firm scores 2 points on that criterium. As it is possible to score up to 2 points per criterium, the total amount of points that can be gathered is 52, when all criteria are described thoroughly and additional firm-specific or project-specific insights are disclosed for every paragraph of the standard.

However, some standards are not applicable to all firms in the sample. When looking for example at paragraph 118 of the disclosure index in Appendix C, significant changes in contract assets and contract liabilities balances do not require explanation when they do not exceed the 10% threshold. Furthermore, paragraph 129 requires organizations to disclose an explanation of the application of the practical expedient from paragraph 63, however, the use of a practical expedient is voluntary. In these situations no explanation or disclosure is required and therefore a N/A (not applicable) score is given to the abovementioned paragraphs in the disclosure index. In this way I control for missing points affecting the results. Disclosure quality of IFRS 15 is measured as the total amount of points scored on the disclosure index based on paragraphs 110-129 subtracted by twice the N/A scores (as two points can be scored for every criterium in the index), divided by the total amount of points that can be scored, which is 52.

Disclosure quality of IFRS 15 = (amount of points-(2*N/A))/52

The maximum score of 2 points per criterium has some limitations. There are companies that have a similar score of 2 points, although variability in the level of disclosure exists. These paragraphs are market as “best practice” and are described in Appendix G. With the designation of best practices the qualities of the disclosures are more distinguished. In order to further improve the accuracy and quality of the disclosure index, some annual reports have been investigated independently and twice. Differences in disclosure scores have been discussed thoroughly before reaching unanimity, with a debate from multiple different perspectives. Due to this discussions the quality and accuracy of the dataset is improved.

The full disclosure index, which is added in Appendix C, contains the disclosure requirements of paragraphs 110-129 (IASB, 2014) and explains whether points should be distributed or not, given the information in the annual reports of the companies.

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6.3.. Independent variable: CFO expertise

CFO expertise is measured by a combination of three sub variables: CFO tenure, professional degree and educational degree. CFO data is primarily gathered from the information disclosed in the annual report. Most companies included an executive summary in their annual report in which the executive management is introduced briefly. Since comprehensive information about the educational background of CFOs is often not disclosed in the annual report, various additional external sources were consulted to obtain this information. For some companies CFO information is disclosed at the corporate investor relations website. For other companies I consulted the CFO summary in the Orbis Company Database, after searching for the name of the firm. When there was no information available in the Orbis Company Database, Bloomberg.com. was the last source I used for educational information about CFOs. Only CFOs with MBA information provided by the abovementioned sources are considered in the measurement of CFO expertise. I performed an extra test by visiting the website of the specified business school and evaluating the legitimacy of the MBA program. After completing the previous steps, I succeeded to obtain the necessary information about whether CFOs are MBA graduates or not. However, for the professional CPA designation it was not always possible to find the information during the abovementioned steps. Therefore, I consulted the national register of Certified Public Accountants for the different countries and checked whether the names of CFOs were included or not. Appendix D provides an overview of different CPA equivalent certifications per country. CFO tenure is measured as the total amount of years the CFO is in its current position, following De Almeida and Lemes (2019). Other researches, such as De Almeida and Lemes (2019) and Sun et al. (2015) measured professional degree and educational degree with a dichotomous variable indicating 1 when CFOs possess a CPA designation, or 0 otherwise. The same applies to the possession of an MBA. Because I measure CFO expertise as the sum of three sub variables, a similar approach with a dichotomous variable that indicates a 1 or 0 for professional and educational degree will not weigh enough compared to CFO tenure. Bernard, Ge, Matsumoto, and Toynbee (2017) argue that education is more decisive in the qualities of CFOs in the early years of their tenure. They also argue that tenure is more decisive in the qualities of CFOs when they are more tenured, because of the acquired firm-specific knowledge (Bernard et al., 2017). Therefore, in order to give a fair weighted score to the two sub variables, the possession of a CPA designation is measured by 10, as well as the MBA. This creates the independent variable CFO expertise: CFO Expertise = CFO tenure (in years)+ (0/10)CPA+(0/10)MBA.

However, this measurement of CFO expertise might raise questions regarding subjectivity and therefore I conducted additional analyses with different weighing scores for the sub variables, which are described in Appendix F. Furthermore, I test de sub variables separately as robustness check.

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6.4. Moderating variables

This research investigates the moderating role of board oversight in the relationship between CFO expertise and IFRS 15 disclosure quality. Board oversight is conceptualized using four key

attributes: board size, board gender diversity, board independence and CEO duality. Most researches investigating board characteristics included firms from companies with similar

board structures and attributes (e.g. Berry et al., 2006). Since this research includes firms from countries from multiple countries in Europe, I had to take into consideration the different aspects of different boards.

6.4.1. Board size

In section 3.2. I explained the distinction between one-tier and two-tier board models and mixed boards. Berry et al. (2006) measured board size as the absolute number of both executive and non-executive board members. As that study is conducted in US context, where a one-tier board is mostly common, this is equivalent to counting the number of directors on both the management board and the supervisory board in two-tier board models. Since this research investigates the moderating role of board oversight, I decided to focus on the directors on the board with an oversight role, as opposed to managing directors. Choudhuri (2017) argues that non-executive directors on one-tier boards are similar to directors on supervisory boards, because of their monitoring role. Therefore I measure board size in a one-tier board model or a mixed board as the absolute number of non-executive directors. In case of a two-tier board model, I measure board size as the absolute number of directors on the supervisory board.

6.4.2. Board gender diversity

Board gender diversity is measured as the coefficient of female directors compared to the total amount of directors on the board, following the approach of Nielsen and Huse (2010). When it comes to one-tier and mixed board models, I used the number of non-executive directors. In case of a two-tier board model, I used the number of directors on the supervisory board.

6.4.3. Board independence

Board independence is measured as the coefficient of independent directors on the board compared to total board members, following the research of Kwak et al. (2012) and Huafang and Jiangua (2007). When it comes to one-tier and mixed board models, I used the number of non-executive directors. In case of a two-tier board model, I used the number of directors on the supervisory board. A director is considered independent if he or she has no is not participating in the firm, has no employment history with the firm and is not a family member of the owners of the company, following Becht, Bolton and Röell (2003). Some boards in the sample merely consisted of employee-representatives versus shareholder-representatives. In these situations I decided to consider only the shareholder-representative directors as independent as these directors comply with the criteria of Becht et al. (2003).

The influence of CFO expertise on IFRS 15 disclosure quality and the moderating role of board oversight: a study of European listed construction companies

Master’s Thesis, MSc Accountancy & Controlling,

track Accountancy