The Influence of Earnings Management and Board Characteristics on Company Efficiency

Hsueh-Li Huang,Hsiu-Yuan Hsu,Hai-Yen Chang,Lien-Wen Liang

doi:10.3390/su132111617

Abstract

Earnings management is a means by which managers manipulate earnings to conceal the true performance of a company. The characteristics of the board of directors can also influence firm performance. This study applies data envelopment analysis (DEA) and the Tobin regression model to investigate the influence of earnings management and board characteristics on company efficiency. The data sample includes 396 Taiwanese electronics and biotechnology companies from 2009 to 2017. The results indicate that earnings management has an insignificant influence on company efficiency with mixed results on the interactions between earnings management and board characteristics. When companies practiced earnings management, director experiences, a higher proportion of female directors, and a higher number of board meetings increased company efficiency. In contrast, a higher number of independent directors and a higher attendance rate of the directors at the board meeting decreased company efficiency. The results of this study suggest that board diversity, more female directors, and meetings could still improve firm performance despite companies’ engagement in earnings management.

Highlights

A multitude of fraud cases has occurred in the last decade, which made earnings management attract increasing attention from both regulators and investors [1]
The purpose of this paper is to examine the influence of earnings management and board characteristics of Taiwan-listed electronic and biotechnology companies on production efficiency from 2009 to 2017 using the data envelopment analysis (DEA) [14,15,16]
We first conducted correlation coefficient analysis to determine whether the problem of collinearity existed due to a high correlation among the selected variables for earnings management, board characteristics, and economic indicators

Summary

Introduction

A multitude of fraud cases has occurred in the last decade, which made earnings management attract increasing attention from both regulators and investors [1]. Earnings management refers to the manipulation of corporate profits presented in financial statements. Corporate managers engage in earnings management for many reasons, such as higher bonuses for managers, fewer errors in financial forecasts by analysts, tax savings, provision of positive information to investors, easier access to required capital, and stability of a company’s profits and losses over a sustained period. Earnings management tends to cause information asymmetry. If the results presented in the financial statements affect the interests of the company or management authority, corporate managers would be more inclined to engage in earnings management practices. The most notable cases include Enron, a large U.S energy company, and WorldCom, a giant US

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