The Impact of Board Characteristics on Earnings Management: Evidence From South Africa

As a result of the corporate scandals of high-profile companies such as WorldCom, Lehman Brothers, Enron, Toshiba, and Olympus (Gillan, 2006; Jiang et al., 2010; Neville et al., 2019), prior studies have questioned the effectiveness of the board of directors’ characteristics in restraining corporate misconduct, one of which is earnings management. This is because the board of directors is the linchpin of corporate governance and provides legitimacy for management's actions. This study, therefore, empirically examines the impact of board characteristics on earnings management based on a sample of 104 South African listed non-financial firms from 2011 to 2018. Specifically, this study examines the impact of board independence, board diversity and SEC characteristics on earnings management using accrual-based and real earnings management as a proxy for earnings management. The accrual-based earnings management is achieved by changing accounting methods and estimates, whereas real earnings management is achieved by altering actual business activities. This study makes several contributions to the extant literature on board characteristics, particularly board independence, board diversity and SEC characteristics. The findings have shown that independent boards, non-executive, co-opted independent directors, a critical mass of female board of directors and board ethnic minority directors are effective in constraining accrual-based earnings management practices. The findings also show that co-opted female directors in the SEC, co-opted independent directors in the SEC, a critical mass of SEC female directors, and the CEO's involvement in the SEC are associated with reduced accrual-based earnings management, and their association applies to different robustness tests. However, the findings indicate that independent directors, non-executive and co-opted independent directors are more likely to use real earnings manipulation via overproduction as a preferred earnings management strategy. More importantly, the association between board characteristics and earnings management is considerably weaker with real earnings management and stronger with accrual-based earnings management. The results have implications for regulators concerned with restraining earnings management and improving the quality of financial reporting. The study raises important considerations about the effectiveness of the SEC as a statutory requirement and provides insights into board diversity and independence.

Name dc:type.qualificationname

PhD

Level dc:type.qualificationlevel

Doctoral

Grantor dc:publisher.institution

De Montfort University

Year dc:date.issued

2022

Author dc:creator

• Robert, Happiness

Licence

• https://dora.dmu.ac.uk/bitstreams/9047b13f-f0f8-4756-88f6-d3ac4af7c1b1/download