Does The Presence Of Independent Directors Influence Accruals Management?

Abstract

Recent debates about the functioning of boards of directors have focused on the disciplinary role of independent directors (ID). Evaluating the effectiveness of this role is an interesting empirical question. This study seeks to examine the influence of these directors and two other corporate governance mechanisms, namely the audit quality and the ownership structure, on earnings management as measured by working capital discretionary accruals (WCDAC). The analysis, conducted over a period of 4 years from 2001 to 2004, is based on a sample of 239 different French companies listed on the Paris stock exchange. The findings show that the presence of ID can moderate the management of WCDAC. This role appears to be more effective when these ID make up at least one third of the members of boards of directors, as recommended by the Viénot 1999 report. The Big 4 auditors can also limit this discretionary adjustment. However, no statistically significant relationship was observed between dispersion vs. concentration of ownership structure and WCDAC. This study adds to the limited research into the relationship between corporate governance and earnings management in France. It also gives empirical evidence on the effectiveness of the Viénot 1999 report’s recommendations. Thus, it should be of interest to academics as well as regulators in preparing and amending corporate governance laws.