Board Composition and Earnings Management

This study investigates the relation between board composition and earnings management based on a cross- sectional sample of 277 Chinese listed firms belonging to manufacturing industry. Earnings management is measured by income-increasing discretionary accruals estimated by the extended modified-Jones model. The empirical result of this study indicates that a smaller board is more effective in preventing income-increasing earnings management. However, we do not find evidence that the ability of the board as an effective monitor is enhanced by the inclusion of independent directors and separation of the positions of the board chairman and the CEO. Finally, we do not find evidence that the existence of audit committee, remuneration and appraisal committee, and nomination committee reduces income-increasing earnings management. The results may imply that the role of independent directors and board committee in monitoring earnings management is not effective in Chinese firms, and that the formal improvement in board structure may not achieve improvement in governance practices by itself.