Accounting Quality in Private Firms: The Impact of Professional Directors

Abstract: This paper studies the impact professional directors have on accounting quality in private firms, where a professional director is defined as a director with board experience in public firms. We hypothesize that board experience in a public firm is a sign of quality. Further, directors in public firms should be more exposed to monitoring activities due to the more dispersed ownership structure in those firms. Employing three accounting quality measures and using regression analysis, we test the relationship between director professionalism and accounting quality. In general, we do not document a higher level of accounting quality in firms with professional directors. Our results suggest that board expertise is less related to accounting quality in private firms than has previously been found for public firms. Moreover, we contribute to the scant literature on corporate governance and accounting quality in private firms. In addition to providing initial results on board expertise and accounting quality in these firms, we also study the association of an additional set of corporate governance factors and accounting quality in private firms.