Are Independent Directors and Supervisory Directors Effective in Constraining Earnings Management

Abstract

Manuscript Type: EmpiricalResearch 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.