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The role of independent directors’ tenure and network in controlling real-earnings management practices

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  • Muhammad Asad

    (The University of Bradford)

  • Saeed Akbar

    (The University of Bradford)

  • Sabur Mollah

    (The University of Sheffield)

Abstract

Manipulating real activities is generally regarded as more damaging to a firm’s long-term growth and value than accrual-based manipulations. We consider this point of view and build on the agency theory framework for investigating the role of independent directors’ (INDs’) tenure and connection to several boards in controlling real-earnings management (REM) practices. We analyze a sample of UK listed non-financial companies over the period between 2005 and 2018. The potential endogeneity issue was controlled by the application of the two-step system-GMM estimations. The research findings suggest that REM was lower in those firms whose INDs were connected to several boards at a time. The findings also show that the association between INDs’ tenure and REM varied with the phases of their tenure. Directors in the early stage of their tenure are less effective at controlling REM, however, as their tenure grew, they generate better oversight over the management conduct, thereby reducing REM. Contrary to this, extended tenure is shown as positively associated with higher REM practices. The overall findings thus suggest that the board monitoring role protects the stakes of the shareholders by constraining REM when INDs have better expertise and rich information acquired through their presence on multiple boards—and when they have moderate board tenure, which is neither too short nor too long. We argue that due to the importance of the role of INDs in the current global scenario this study has policy implications.

Suggested Citation

  • Muhammad Asad & Saeed Akbar & Sabur Mollah, 2024. "The role of independent directors’ tenure and network in controlling real-earnings management practices," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1251-1279, November.
    • Handle: RePEc:kap:rqfnac:v:63:y:2024:i:4:d:10.1007_s11156-024-01288-y
    DOI: 10.1007/s11156-024-01288-y
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    More about this item

    Keywords

    Independent directors; Tenure; Multiple-board sittings; Phases in tenure; Real-earnings management;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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