Does increased board independence reduce earnings management? Evidence from recent regulatory reforms

Xia Chen (), Qiang Cheng () and Xin Wang ()
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Xia Chen: Singapore Management University
Qiang Cheng: Singapore Management University
Xin Wang: The University of Hong Kong

Review of Accounting Studies, 2015, vol. 20, issue 2, No 10, 899-933

Abstract: Abstract We examine whether recent regulatory reforms requiring majority board independence reduce the extent of earnings management. Firms that did not have a majority of independent directors before the reforms (referred to as noncompliant firms) are required to increase their board independence. We find that, while noncompliant firms on average do not experience a significant decrease in earnings management after the reforms compared to other firms, noncompliant firms with low information acquisition cost experience a significant reduction in earnings management. The results are similar when we examine audit committee independence and when we use alternative proxies for information acquisition cost and earnings management. These findings indicate that independent directors’ monitoring is more effective in a richer information environment.

Keywords: Earnings management; Corporate governance; Board independence; Information environment (search for similar items in EconPapers)
JEL-codes: G32 M40 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-015-9316-0

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