Does Industry Regulation Matter? New Evidence on Audit Committees and Earnings Management

• In Event: Concurrent Session 3.2: Corporate Governance and Regulation

Abstract

This paper investigates the moderating role of industry regulation on the effectiveness of audit committees in restricting corporate earnings management. Using comprehensive panel data of S&P 1500 firms between 2003 and 2007, we find that the proportion of outside CEO directors on an audit committee is positively associated with the magnitude of abnormal accruals in unregulated industries, while this association is weaker in regulated industries. Further, the proportion of financial experts on an audit committee is negatively associated with earnings management in both regulated and unregulated industries. In addition, the average tenure of audit committee members is positively associated with earnings management in regulated industries, but negatively in unregulated industries. Finally, audit committee members’ average directorship reduces accounting accruals in unregulated industries, but increases accruals in regulated industries. Overall, our findings contribute to the literature by investigating the interplay between industry regulation and corporate governance mechanisms in constraining earnings management.

Authors

• Rong Yang, Rochester Institue of Technology

• Lerong He, The College at Brockport, SUNY