دانلود رایگان مقاله انگلیسی چه زمانی مدیران خارجی ناظران موثرتری هستند؟ شواهد از دستکاری فعالیت های واقعی - Sage 2017

Introduction

A large body of the corporate governance literature examines the disciplinary role of outside directors in overseeing the CEO. Although it is certainly a critical factor in effective monitoring, independence alone is not sufficient. Fulfilling the monitoring role also requires a skilled and knowledgeable board (Acharya, Myers, & Rajan, 2011; Adams & Ferreira 2007; Raheja, 2005). The skills and knowledge needed for monitoring vary with the type of CEO activity being monitored. For certain managerial actions that require sufficient firm-specific knowledge and expertise to exercise discipline, board informedness could be at least as critical as board independence. Given the trade-off between informedness and independence, outside directors are not necessarily better monitors than inside directors due to information disadvantages.1 In this study, we examine whether and to what extent an independent board constrains the CEO from taking real actions to manage financial performance. We refer to real earnings management as the CEO’s purposeful intervention in normal business practice in an effort to influence the output of the accounting system (Gunny, 2010; Roychowdhury, 2006).2 Relative to accrual-based earnings management, real earnings management is inherently more difficult to detect and requires more firm-specific information to understand because it can involve any real decision that deviates from normal business practice (Cohen, Dey, & Lys, 2008; Lo, 2008).

Conclusion

In this article, we provide evidence that suggests board informedness may be equally as important as board independence, if not more, in the monitoring of real activities manipulation. In a sample of 13,414 S&P 1500 firms between 1998 and 2013, we fail to detect a significant relation between board independence and real earnings management, suggesting that more independent boards are not always more effective monitors of this type of activity. This is likely because outside directors suffer an informational disadvantage relative to insiders, and may lack the knowledge required to effectively monitor this type of activity.

In cross-sectional analyses, we show that as the firm-level information environment improves, more independent boards become more effective at constraining real earnings management. Specifically, when outsiders’ information processing costs become lower and/ or insiders are more willing to share their information with outsiders, more independent boards are more effective monitors against real earnings management. Our results are robust to subsample analyses of SEO firms and to correcting for endogeneity of board structure.

Our empirical evidence provides additional support to prior literature that also suggests outside directors are not able to perform as well when the cost of becoming informed is high (Boone et al., 2007; Duchin et al., 2010; Lehn et al., 2009; Linck et al., 2008). Armstrong et al. (2014) find that an exogenous increase in board independence leads to an increase in corporate transparency, highlighting the informational demand of outside directors to carry out their charge. Although it is an implicit assumption in Armstrong et al. (2014) that board informedness plays a critical role in effective monitoring, we provide empirical evidence on its importance and trade-off against board independence in the context of monitoring real earnings management. Furthermore, this study has implications for well-intentioned corporate governance reforms such as the Sarbanes-Oxley Act. Our results indicate that the reforms should take into account the valuable roles played by knowledgeable inside directors.