Monitoring female directors and earnings management, does corporate governance matter?

Abstract

In contrast to prior research on female directors’ participation, this study focuses on female directors playing a monitoring role within boardrooms. In addition, the current study investigates whether these female directors freeride from other strong governance mechanisms in place. Based on a sample of US firms, we document that female directors fulfilling monitoring responsibilities play a crucial role in protecting shareholders’ interests in both weak and strong corporate governance settings. In addition, interestingly, our results suggest that female directors, particularly monitoring female directors, significantly mitigate earnings management in firms audited by Big-4 and non-Big-4 auditors although their impact seems to be more prominent within non-Big-4 audit firms. That is, it seems that these directors are more likely to scrutinize managers closely when they feel that shareholders are at risk of being subjected to deception due to opportunistic practices by managers (i.e. when managers deliberately choose relatively low-quality auditors to audit corporate financial reports).

Keywords

• Earnings management
• female directors
• corporate governance
• monitoring directors
• audit quality
• Business, Management and Accounting