Does Increased Board Independence Reduce Earnings Management? Evidence from Recent Regulatory Reforms

51 Pages Posted: 12 Nov 2014

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Xin Wang

The University of Hong Kong

Date Written: November 10, 2014

Abstract

In this paper, we examine whether recent regulatory reforms requiring majority board independence are effective in reducing the extent of earnings management. Firms that did not have a majority of independent directors prior to the reforms (referred to as non-compliance firms) are required to increase their board independence. We find that, while non-compliance firms on average do not experience a significant decrease in earnings management after the reforms compared to other firms, non-compliance 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

JEL Classification: G32, M40

Suggested Citation

Chen, Xia and Cheng, Qiang and Wang, Xin, Does Increased Board Independence Reduce Earnings Management? Evidence from Recent Regulatory Reforms (November 10, 2014). Review of Accounting Studies, Forthcoming, Singapore Management University School of Accountancy Research Paper No. 2015-20, Available at SSRN: https://ssrn.com/abstract=2522695

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Xin Wang

The University of Hong Kong ( email )

1215 K.K.Leung Building
Hong Kong
Hong Kong

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