The relationship between professional knowledge of independent director and supervisor and earnings management
Date Issued
2009
Date
2009
Author(s)
Lin, Guan-Chun
Abstract
Taiwan has introduced the institution of independent directors and independent supervisors for over six years. However, most prior studies about the impact of corporate governance mechanisms on the quality of financial reports have been focusing on the characteristics such as board size, managerial shareholdings, and independence. There are few researches examining the expertise mechanism.hus, this thesis aims to investigate the relationship between professional knowledge of independent directors and supervisors and earnings management. This thesis use the sample period of 2002 through 2007 consisting of 3073 firm-year observations, and decompose the professional knowledge into four types, accounting, finance, supervisory and law. Results indicate the higher the ratio of the independent directors with accounting or finance expertise the lesser the earnings management behaviors, especially when the managers intend to manage earnings upwards. However, about the independent supervisors, results fail to identify significantly negative relation between the ratio of independent supervisors with accounting or finance expertise and earnings management. The potential explanations are supervisors in Taiwan are unable to get proper information and to timely get involved in board’s decision making process as independent directors. Moreover, enterprise may view independent supervisors as “reputable” experts, so they don’t have actual power to oversee managements and are unable or afraid to constrain behaviors that may have adverse impact on the quality of financial information. Thus, even if having accounting or finance professional knowledge, they are unable to exercise the role well in preventing earnings management.
Subjects
corporate governance
independent directors
independent supervisors
earnings management
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