The Impact of Board Characteristics on Earnings Management: UK Evidence

Abstract

This thesis uses mainly the agency theory to investigate the impact of board characteristics on its effectiveness in performing the monitoring function. It consists of three empirical studies. The first study explores the impact of board characteristics; particularly independence, CEO duality, activity and size; on earnings management for a sample of FTSE 350 UK listed companies. The sample for the first study comprises 168 non-financial listed firms during the period 2010-2014. Findings show that hiring independent directors on the board mitigates earnings management, both AEM and REM. Increasing the size of the board mitigates one technique of earnings management, REM, but its effectiveness in mitigating REM rests on several factors. Moreover, CEO duality is negatively associated with REM. Finally, no significant association is found between earnings management and other board characteristics.
The second study investigates the diversity of the board of directors, specifically professional background and social diversity, and its impact on the board effectiveness in performing its monitoring function. Using the same sample investigated in the first study, results indicate that board professional background diversity might have negative impacts on the board effectiveness in mitigating REM, while board social diversity is insignificantly related to earnings management.
The third study focuses on the impact of diversifying the board on its effectiveness in mitigating earnings management in family businesses for a sample of FTSE All Share UK listed companies. Based on data of 32 UK family-controlled firms listed during the period 2010-2017, findings show that board professional background diversity is positively associated with earnings management, while board gender diversity is insignificantly related to earnings management. Findings for the family businesses sample still emphasize the negative implications that board diversity might have in relation to performing the monitoring function.
The findings of this thesis are beneficial to regulators and policy makers as they highlight the negative implications of board diversity and ways to overcome those implications in both family and non-family settings.