Do Directors Serving on Multiple Audit Committees Independently Monitor or Help Promote Earnings-Management by Firms? Identifying Vigilant vs. Compliant Directors

47 Pages Posted: 6 Oct 2015 Last revised: 3 May 2018

See all articles by Mark E. Peecher

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Stephen P. Rowe

University of Arkansas

Padmakumar Sivadasan

Tulane University

Date Written: April 25, 2018

Abstract

Most research in accounting and finance assumes that outside directors who obtain multiple board memberships do so by cultivating reputations as vigilant directors who are capable and committed to monitoring management. We investigate an alternative perspective that there exists an active labor market for compliant directors who are not capable of and/or not committed to monitoring management. We divide outside directors who serve on audit committees into vigilant versus compliant directors based on whether their contracts with external auditors provide stronger versus weaker incentives to monitor managements’ financial reporting. We predict and find that each additional audit committee membership is associated with higher levels of income-increasing earnings management, but only for compliant directors. Also, as predicted, CFOs’ equity incentives to manage earnings amplifies the positive association between additional audit committee memberships and higher levels of earnings management, again only for compliant directors. These findings highlight the importance of questioning the vigilance of outside directors and of controlling for their incentives when conducting future governance research.

Keywords: Corporate governance, Outside directors, Multiple directorships, Earnings quality, Restatements, Director independence

Suggested Citation

Peecher, Mark E. and Rowe, Stephen P. and Sivadasan, Padmakumar, Do Directors Serving on Multiple Audit Committees Independently Monitor or Help Promote Earnings-Management by Firms? Identifying Vigilant vs. Compliant Directors (April 25, 2018). Available at SSRN: https://ssrn.com/abstract=2669891 or http://dx.doi.org/10.2139/ssrn.2669891

Mark E. Peecher (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Stephen P. Rowe

University of Arkansas ( email )

Business Bldg. 450
Fayetteville, AR 72701
United States

Padmakumar Sivadasan

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
5048655208 (Phone)

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