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The effect of co-opted directors on real earnings management

Author

Listed:
  • Robin Chen

    (National Taipei University)

  • Hongrui Feng

    (Penn State Behrend)

  • Xuechen Gao

    (University of Central Arkansas)

  • Shenru Li

    (Macau University of Science and Technology)

Abstract

Co-opted directors are those elected after a CEO takes office. In this paper, we examine how co-opted directors affect real earnings management. Our results show that, due to the lack of director independence, a board with more co-opted directors plays a weaker monitoring role, which significantly increases the level of real earnings management. A DID setting using the Sarbanes–Oxley Act of 2002 as a natural experiment demonstrates that there is most likely a causal effect of board co-option on real earnings management. Furthermore, we find that this causal effect is more pronounced in firms with poor corporate governance.

Suggested Citation

  • Robin Chen & Hongrui Feng & Xuechen Gao & Shenru Li, 2023. "The effect of co-opted directors on real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 61(4), pages 1315-1339, November.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:4:d:10.1007_s11156-023-01187-8
    DOI: 10.1007/s11156-023-01187-8
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    More about this item

    Keywords

    Co-option of directors; Real earnings management; Corporate governance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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