Melbourne Accounting Research Seminar - Associate Professor Chen Chen

Associate Professor Chen Chen from Monash University will present a MARS seminar.

Topic: Monitoring Ability of Independent Directors: The Effect of Commonality in Expertise on Earnings Management

Abstract:  This paper hypothesises that the ability of independent directors to monitor financial reporting quality depends on whether they have the expertise to match with that of executives. We find that higher commonality in expertise between the firm’s executives and independent directors is associated with lower probability of earnings management. Difference-in-difference analysis using independent director’s unexpected death and retirement suggests that our findings are plausibly causal. The effect of commonality in expertise is stronger for directors with accounting and finance skills, business skills, and for directors whose role is more important in monitoring financial reporting quality. It is also stronger for firms with higher monitoring needs, which enjoy the most benefit from improved monitoring ability. On the whole, the evidence is consistent with the improved monitoring ability hypothesis and commonality in expertise is a measure of monitoring ability of independent directors.