THE EFFECT OF BOARD SIZE, BOARD INDEPENDENCE, AND THE COMPOSITION OF BOARD INDEPENDENCE ON ACCRUAL AND REAL EARNINGS MANAGEMENT

Abstract

This paper examines the effect of quantity and quality of board on mitigating accrual and real earnings management by using a sample from companies listed in the S&P 500 index from 2010 to 2019. The study uses random-effect regression analysis and finds evidence that large board size is an ineffective tool for reducing earnings management. In contrast, larger board independence proves to mitigate earnings manipulation. However, when board independence interacts with board size, the favourable influence of board independence to prevent earnings management is reduced as the board size rises. It can be suggested that a small board dominated by independent directors is more effective in reducing both accrual and real earnings management than a larger board with larger outside directors. The findings conclude that board characteristics are not separate individuals but complementary characters. Hence, companies should not only rely on the board's quantity but also pay attention to its quality to develop an effective board to reduce earnings management.