Earnings Management and Board Characteristics: Evidence from French ListedFirms

Abstract

The purpose of this paper is to test the effect of the board characteristics including; its size, independence, the CEO duality and its activity on the earnings management in companies listed on the SBF 250. We use discretionary accruals (DA) as a proxy for the earnings management. To calculate DA, we use two models which are the modified Jones model (and performance-matched discretionary accruals estimated from the modified Jones model. Based on a sample of 70 French listed companies over the period of 4 years from 2008 to 2012, the study finds that the earnings management is negatively associated with the board size. This suggests that large boards are more effective in monitoring a CEO‘s action. The CEO duality is found to have a positive relationship with the earnings management suggesting that, by combining the role of the CEO and that of the chairman of the board helps increase the earnings management because the CEO may reduce the effectiveness of the board and create a conflict between the management and the board that may reduce the earnings management. Moreover, the board activity is found to have a positive relation with the earnings management suggesting that a board meeting more often helps to increase the earnings management. The present study finds no effect of the board independence on the earnings management. This result is in contradiction with previous studies that have found a significant negative relationship between these two variables. Overall, from the result of this study, we conclude that the earnings management takes place in French listed companies.