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Board characteristics and earnings management. Does firm size matter?

Peter Nderitu Githaiga · Paul Kabete · Tirisa Caroline Bonareri

97 citations0/0 files storedCogent Business & Management

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

The purpose of this paper is to extend the existing literature by empirically examining the effect of board characteristics on earnings management (EM) from a developing region perspective. The study further adds literature by examining whether firm size moderates the relationship between board characteristics and EM. This study employs data drawn from 88 listed firms in the East African Community (EAC) for the period between 2011 and 2020. The study used the system generalized method of moments (SGMM) estimation model to take care of potential endogeneity and reverse causality. The findings revealed a positive and significant relationship between board size and EM. The findings further indicated that board independence, board gender diversity, and board financial expertise had a negative and significant effect on EM. In addition, the findings confirmed that firm size moderated the relationship between board size, board independence, board gender diversity, and EM. The insights of this study may provide useful information for shareholders and regulators in evaluating board attributes that are effective in mitigating earnings management practices from a developing region. Further, board effectiveness in deterring EM should be evaluated with regard to firm size. Just a few empirical studies have examined the relationship between board characteristics and EM in developing regions. Thus, this study contributes to the existing literature by empirically examining the topic in the EAC. Further, the study fills the existing gap in literature by examining whether firm size moderates the relationship between board characteristics and EM.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1983Separation of Ownership and Control 1980Agency Problems and the Theory of the Firm 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 1995Detecting Earnings Management.

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