The effect of co-opted directors on real earnings management

Robin Chen (), Hongrui Feng (), Xuechen Gao () and Shenru Li ()
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Robin Chen: National Taipei University
Hongrui Feng: Penn State Behrend
Xuechen Gao: University of Central Arkansas
Shenru Li: Macau University of Science and Technology

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 4, No 5, 1315-1339

Abstract: Abstract Co-opted directors are those elected after a CEO takes office. In this paper, we examine how co-opted directors affect real earnings management. Our results show that, due to the lack of director independence, a board with more co-opted directors plays a weaker monitoring role, which significantly increases the level of real earnings management. A DID setting using the Sarbanes–Oxley Act of 2002 as a natural experiment demonstrates that there is most likely a causal effect of board co-option on real earnings management. Furthermore, we find that this causal effect is more pronounced in firms with poor corporate governance.

Keywords: Co-option of directors; Real earnings management; Corporate governance (search for similar items in EconPapers)
JEL-codes: G34 M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01187-8

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