An Empirical Study On Board Characteristics And Earnings Management

As the core mechanism of corporate governance, the board plays an important role in overseeing the company's financial reporting process and the quality of the final report. Since many companies'management always adopt the way of earnings management because of a variety of reasons, which misleading shareholders and the public, the board's role of supervision become very important. Therefore, this paper investigates the relationship between board characteristics and the extent of earnings management with the annual report data. We hope that the paper can provide some useful empirical evidence for the relevant regulatory authorities and policy makers for the use of making scientific policies.We select the listed companies which listed in Shanghai and Shenzhen stock exchange between 2005 and 2006 as research sample. With measuring the corporate earnings management by cross-sectional modified Jones model, we investigate whether a firm's board characteristics have an effect on decreasing the extent of earnings management from the point of earnings management ways and company form. We find that earnings management is significantly associated with some of board characteristics. Firstly, from the view of earnings management ways, income increasing earnings management is positively associated with board composition and negatively associated with the percentage of directors who own the stocks. Income decreasing earnings management is negatively associated with the percentage of independent directors and the frequency of board meetings. Secondly, as to the state-owned enterprises, earnings management is positively associated with the average numbers of directorships held by independent directors in unaffiliated firms, negatively associated with the percentage of independent directors and the frequency of board meetings. As to private enterprises, earnings management is positively associated with board composition and negatively associated with the percentage of directors who own the stocks. Finally, in accordance with our empirical results, we bring up some advices such as improving the board and the external corporate governance mechanism.