Corporate governance board diversity and earnings management An analysis of the US Market

Recent corporate scandals and crisis have highlighted how complex and nuanced is nowadays the “corporate governance”. Prevailing views about what constitutes effective governance have changed from a relatively binary check-the-box approach to tackling questions such as how to balance different interests, advance the sustainable, long-term success and enhance company reputation and credibility. The role of the board in overseeing corporate strategy and resilience, fostering reputation and trust in the corporation continues to evolve with a greater emphasis on the diversity of its members. The characteristics of the board of directors are key components of corporate governance structure and have generally been perceived as effective mechanisms in mitigating unethical behaviours such us earnings management. This work then investigates the impact of board diversity on earnings management. The board diversity measure used in this study is a novel measure based on the economic literature on the interpersonal diversity of the population (Ashraf and Galor, 2013). The study uses the interpersonal diversity of the board members for US firms over the period 1999 to 2019 to investigate how this new board diversity measure influences the board’s earning management behaviours. The undergoing assumption is that interpersonal diversity would moderate earnings management practices. The main finding shows that the higher the board interpersonal diversity the lower the accrual-based earnings management and real earnings management.