Are Independent Directors and Supervisory Directors Effective in Constraining Earnings Management?

Abstract

Research Question/Issue: The aim of this paper is to analyze the impact of corporate governance on earnings management in China. It focuses on two aspects from the perspective of board monitoring: the role of independent directors on the board and the supervisory directors in constraining earnings manipulation. This paper examines whether the independence, financial/accounting expertise and official background and a higher proportion of independent directors and supervisors are related to the absolute value of discretionary accruals or discretionary revenue. Research Findings/Insights: By conducting the research on a large sample of Chinese listed companies from 2005 to 2010, the empirical results suggest that Chinese two-tier board structure comprising aboard of directors with at least one third independent directors and supervisory board fails to mitigate earnings management. Theoretical Implications: This study adds to the corporate governance literature by linking the independent directors and supervisory directors and earnings management. It shows that the principal-principal agency conflict between the controlling shareholders (the State) and minority shareholders is the main cause of earnings management in China. Practical Implications: The results support the evidence that the regulators should pay more attention to enhance the authentic independence of independent directors and supervisory directors in Chinese firms.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 20 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.