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

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  • Xia Chen

    (Singapore Management University)

  • Qiang Cheng

    (Singapore Management University)

  • Xin Wang

    (The University of Hong Kong)

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.

Suggested Citation

  • Xia Chen & Qiang Cheng & Xin Wang, 2015. "Does increased board independence reduce earnings management? Evidence from recent regulatory reforms," Review of Accounting Studies, Springer, vol. 20(2), pages 899-933, June.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:2:d:10.1007_s11142-015-9316-0
    DOI: 10.1007/s11142-015-9316-0
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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