Busy independent directors and IPO company earnings management: Evidence from China

Abstract

This study investigates the effect of busy independent directors on earnings management in Chinese initial public offering (IPO) companies from 2010 to 2020. Using various measures of busy independent directors, the results indicate that directors in IPO companies play a significant role in supervision and governance, thereby significantly mitigating earnings management. Busy independent directors, serving on multiple boards, may face time constraints, but, intriguingly, companies with such directors show a lower inclination for earnings manipulation. This suggests that despite potential time pressures, the independent oversight provided by these directors serves as a deterrent to financial reporting manipulation in the context of Chinese IPOs, underscoring the importance of robust corporate governance structures for transparency and reliability. Additionally, this study identifies specific conditions that amplify the constraining effect and finds that the effect of busy independent directors on earnings management in IPO companies is more significant in companies with high compensation for independent directors, independent directors serving off-site, and companies that receive higher media attention. Mechanism testing indicated that busy independent directors mitigate IPO firms’ earnings management by engaging reputable audit firms and enhancing the effectiveness of internal controls. This nuanced analysis offers valuable insights into how busy, independent directors actively contribute to alleviating the risks associated with earnings management during the IPO process. This study enhances our understanding of the governance benefits of active independent directors in multiple roles and offers novel perspectives on how stakeholders can influence and constrain earnings management in IPO companies.

Keywords

• Busy independent directors
• IPO companies
• Earnings management
• Media attention
• Internal controls