Earnings Management and Board Monitoring: Does CEO Power Have a Moderating Role?

Sammanfattning

The purpose of this study is twofold. The first is to examine the board monitoring's impact on accrual-based earnings management, as reflected by the absolute value of discretionary accruals. The second is to investigate the moderating effect of CEO power on the relationship between board monitoring and accrual-based earnings management. The study follows a deductive approach and a quantitative method in analyzing secondary data retrieved from databases and annual reports. Moreover, we use pooled-OLS, fixed-effects, and instrumental variable approach models to test our hypotheses. From an agency theory perspective, we analyze board monitoring, CEO power, and their respective impacts on accrual-based earnings management. We discuss information asymmetry, moral hazard, risk aversion, and earnings retention, among other theories. The empirical analysis is based on a sample of 400 firms, making up 7,489 observations, included in the S&P 500 index between 2000 and 2021. We conclude that board monitoring, as proxied predominantly by the audit committee, followed by board independence, reduces earnings management. Further, we find that CEO power moderates the relationship between board monitoring and earnings management. More specifically, our results indicate that firms with a dual CEO structure experience less efficient and lower-quality board monitoring.