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.
Accounting | Corporate Finance
Corporate Reporting and Disclosure
Review of Accounting Studies
CHEN, Xia; CHENG, Qiang; and WANG, Xin.
Does increased board independence reduce earnings management? Evidence from the recent regulatory reform. (2015). Review of Accounting Studies. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1385