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Corporate Boards, Audit Committees, and Earnings Management: Pre- and Post-SOX Evidence

Authors

  • Aloke Ghosh,

    1. The authors are respectively from the Stan Ross Department of Accountancy, Baruch College, The City University of New York; the Department of Accounting, University of Bocconi; and the School of Business, Yonsei University. They thank Martin Walker (editor), an anonymous referee, John Bizjak, Rob Fisher, Larry Harris, Murgie Krishnan, Ying Li, Martien Lubberink, Ken Peasnell, Peter Pope, Steve Lustgarten, Steve Young and the participants of Baruch College and Office of Economic Analysis at the SEC workshops for their helpful comments and suggestions. The authors are especially grateful to Hangsoo Kyung for help in collecting some of the corporate governance data.
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  • Antonio Marra,

    1. The authors are respectively from the Stan Ross Department of Accountancy, Baruch College, The City University of New York; the Department of Accounting, University of Bocconi; and the School of Business, Yonsei University. They thank Martin Walker (editor), an anonymous referee, John Bizjak, Rob Fisher, Larry Harris, Murgie Krishnan, Ying Li, Martien Lubberink, Ken Peasnell, Peter Pope, Steve Lustgarten, Steve Young and the participants of Baruch College and Office of Economic Analysis at the SEC workshops for their helpful comments and suggestions. The authors are especially grateful to Hangsoo Kyung for help in collecting some of the corporate governance data.
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  • Doocheol Moon

    Corresponding author
    1. The authors are respectively from the Stan Ross Department of Accountancy, Baruch College, The City University of New York; the Department of Accounting, University of Bocconi; and the School of Business, Yonsei University. They thank Martin Walker (editor), an anonymous referee, John Bizjak, Rob Fisher, Larry Harris, Murgie Krishnan, Ying Li, Martien Lubberink, Ken Peasnell, Peter Pope, Steve Lustgarten, Steve Young and the participants of Baruch College and Office of Economic Analysis at the SEC workshops for their helpful comments and suggestions. The authors are especially grateful to Hangsoo Kyung for help in collecting some of the corporate governance data.
      Address for correspondence: Aloke Ghosh, Stan Ross Department of Accountancy, Baruch College, The City University of New York, Box B12-225, One Bernard Baruch Way, New York, NY 10010, USA.
      e-mail: Aloke.Ghosh@baruch.cuny.edu
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Address for correspondence: Aloke Ghosh, Stan Ross Department of Accountancy, Baruch College, The City University of New York, Box B12-225, One Bernard Baruch Way, New York, NY 10010, USA.
e-mail: Aloke.Ghosh@baruch.cuny.edu

Abstract

Abstract:  Primarily motivated by the claims that the recent regulatory initiatives empowering boards and audit committees restrain earnings management, we examine whether board characteristics (composition, size, and structure) and audit committee characteristics (composition, size, activity, expertise, ownership, and tenure) are associated with earnings management before and after Sarbanes-Oxley Act (SOX). Using absolute performance-adjusted discretionary accruals, special items, and deferred tax expense as alternative constructs for earnings management, we find that earnings management does not vary with board composition and structure, or with audit committee composition, expertise, and ownership. In contrast, board size and audit committee size, activity, and tenure are associated with earnings management. More important, the strength of this association is considerably weaker for the post-SOX years compared to the pre-SOX years. Finally, we find no evidence to suggest that the overall level of earnings management declined following SOX.

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