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Board external connectedness and earnings management

This is a research report on Board external connectedness and earnings management uploaded by Jasmine Pvk in category: All Documents »  Finance »  Wealth Management section of our research repository.
534 views, 0 comments, Last Update: Feb 3, 2016.
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Tags: Earnings management , Board external connectedness
Description:
In this study we explore how board external connectedness is related to firm's earnings management.
Board external connectedness is gauged by the percentage of board members with at least one external
board membership, and earnings management is gauged by the level of discretionary accruals from the
modified Jones model. We postulate that externally connected directors could learn something from
their connected firms, and this experience could be translated into monitoring effectiveness which in
turn reduces a firm's level of earnings management. We use the sample consisting of 5940 firm-year
observations from the listed firms in Taiwan in 2007e2011 sampling period to test the learning-effect
hypothesis. The empirical finding supports this hypothesis by showing that board external connectedness
is negatively correlated with the level of earnings management and that the negative relation is
more conspicuous for the same-industry connectedness. However, the negative relation between board
external connectedness and earnings management becomes insignificant when the firm has an external
financing plan. Finally, independent directors' same-industry connectedness does reduce the level of
earnings management when the firm has an external financial plan.



 

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