Earnings quality and financial flexibility: A moderating role of corporate governance

The aim of this study is primarily to demonstrate how earnings quality is an influential determinant of financial flexibility. Secondly, how earnings quality affects financial flexibility. And finally, to provide evidence of the role of corporate governance between earnings quality and financial fle...

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Main Authors: Rashidul Islam, Ziaul Haque, Rehnuma Hoque Moutushi
Format: Article
Language:English
Published: Taylor & Francis Group 2022-12-01
Series:Cogent Business & Management
Subjects:
Online Access:https://www.tandfonline.com/doi/10.1080/23311975.2022.2097620
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author Rashidul Islam
Ziaul Haque
Rehnuma Hoque Moutushi
author_facet Rashidul Islam
Ziaul Haque
Rehnuma Hoque Moutushi
author_sort Rashidul Islam
collection DOAJ
description The aim of this study is primarily to demonstrate how earnings quality is an influential determinant of financial flexibility. Secondly, how earnings quality affects financial flexibility. And finally, to provide evidence of the role of corporate governance between earnings quality and financial flexibility composing overall corporate governance index (CG-INDEX). This study considered unbalanced panel data from the year 2007 to 2020 from the database CSMAR yielding 14,088 firm-year observations. This study used liquidity as the proxy of financial flexibility, and also used a comprehensive index of corporate governance constructed by adopting the principal component analysis and STATA has been used for analyzing data. The study used System GMM regression for analysis and controls endogeneity by applying lag financial flexibility as an instrumental variable. The empirical results reveal that poor earnings quality significantly negatively influences the level of corporate financial flexibility. The results also demonstrate that corporate governance can significantly positively moderate the relationship between earnings quality and financial flexibility. This suggests that when the earnings quality is poor, firms are less likely to be financially flexible in holding liquidity. More specifically, firms with poor earnings quality will reduce their financial flexibility of firms; hence, firms need to provide high-quality earnings in order to be more financially flexible. Earnings quality is an important factor, which led the author to examine how earnings quality influences financial flexibility. Under the views of agency theory and positive accounting theory, poor earnings quality is a source of amplified shareholder’s concern of increased informational asymmetry, which may adversely affect the firm’s financial flexibility. Conversely, higher earnings quality reduces the information asymmetry which leads to higher financial flexibility. This study provides a way how to achieve financial flexibility with the assistance of corporate governance which is essential to combat financial crises and smooth business operations successfully.
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spelling doaj.art-4ccd9ee57c804393be3504fc62568ea02022-12-22T03:01:16ZengTaylor & Francis GroupCogent Business & Management2331-19752022-12-019110.1080/23311975.2022.2097620Earnings quality and financial flexibility: A moderating role of corporate governanceRashidul Islam0Ziaul Haque1Rehnuma Hoque Moutushi2Department of Business Administration, East West University, Dhaka, BangladeshDepartment of Management Information Systems, Noakhali Science and Technology University, Sonapur, BangladeshDepartment of Business Administration, East West University, Dhaka, BangladeshThe aim of this study is primarily to demonstrate how earnings quality is an influential determinant of financial flexibility. Secondly, how earnings quality affects financial flexibility. And finally, to provide evidence of the role of corporate governance between earnings quality and financial flexibility composing overall corporate governance index (CG-INDEX). This study considered unbalanced panel data from the year 2007 to 2020 from the database CSMAR yielding 14,088 firm-year observations. This study used liquidity as the proxy of financial flexibility, and also used a comprehensive index of corporate governance constructed by adopting the principal component analysis and STATA has been used for analyzing data. The study used System GMM regression for analysis and controls endogeneity by applying lag financial flexibility as an instrumental variable. The empirical results reveal that poor earnings quality significantly negatively influences the level of corporate financial flexibility. The results also demonstrate that corporate governance can significantly positively moderate the relationship between earnings quality and financial flexibility. This suggests that when the earnings quality is poor, firms are less likely to be financially flexible in holding liquidity. More specifically, firms with poor earnings quality will reduce their financial flexibility of firms; hence, firms need to provide high-quality earnings in order to be more financially flexible. Earnings quality is an important factor, which led the author to examine how earnings quality influences financial flexibility. Under the views of agency theory and positive accounting theory, poor earnings quality is a source of amplified shareholder’s concern of increased informational asymmetry, which may adversely affect the firm’s financial flexibility. Conversely, higher earnings quality reduces the information asymmetry which leads to higher financial flexibility. This study provides a way how to achieve financial flexibility with the assistance of corporate governance which is essential to combat financial crises and smooth business operations successfully.https://www.tandfonline.com/doi/10.1080/23311975.2022.2097620Earnings qualitycorporate governancefinancial flexibility
spellingShingle Rashidul Islam
Ziaul Haque
Rehnuma Hoque Moutushi
Earnings quality and financial flexibility: A moderating role of corporate governance
Cogent Business & Management
Earnings quality
corporate governance
financial flexibility
title Earnings quality and financial flexibility: A moderating role of corporate governance
title_full Earnings quality and financial flexibility: A moderating role of corporate governance
title_fullStr Earnings quality and financial flexibility: A moderating role of corporate governance
title_full_unstemmed Earnings quality and financial flexibility: A moderating role of corporate governance
title_short Earnings quality and financial flexibility: A moderating role of corporate governance
title_sort earnings quality and financial flexibility a moderating role of corporate governance
topic Earnings quality
corporate governance
financial flexibility
url https://www.tandfonline.com/doi/10.1080/23311975.2022.2097620
work_keys_str_mv AT rashidulislam earningsqualityandfinancialflexibilityamoderatingroleofcorporategovernance
AT ziaulhaque earningsqualityandfinancialflexibilityamoderatingroleofcorporategovernance
AT rehnumahoquemoutushi earningsqualityandfinancialflexibilityamoderatingroleofcorporategovernance