Attention Please: Does Audit Committee Directors’ Unequal Allocation of Attention to Multiple Directorships Affect Firms’ Earnings Management?

Abstract

We examine the relationship between audit committee directors’ unequal allocation of attention to multiple directorships and firms’ earnings management. We find that firms with a greater proportion of audit committee directors for whom the directorship is more important than their other directorships have lower abnormal accruals. These firms are also less likely to have securities litigation with GAAP violations, accounting restatements, and internal control weaknesses. Our study documents how audit committee directors’ unequal prioritization of their time and effort to different directorships affects the strength of accounting monitoring and thus highlights the importance of considering how much monitoring attention a firm would receive when hiring an audit committee director.

Keywords: multiple directorships, audit committees, earnings management