Attention Please: How Does Audit Committee Directors’ Uneven Attention among Multiple Directorships Affect Firms’ Earnings Quality?

• In Event: Accounting Quality and Internal Controls

Abstract

We examine the relation between audit committee directors’ unequal distribution of their attention to multiple directorships and firms’ earnings quality. We find that firms with a greater proportion of audit committee directors for whom the directorship is relatively more important engage in less real earnings management and have lower discretionary accounting accruals. These firms are also less likely to manipulate earnings to just meet or beat earnings benchmarks and to have internal control deficiencies under sections 302 and 404 of the Sarbanes- Oxley Act of 2002. In addition, these firms have more informative accounting numbers as indicated by a stronger association between current stock returns and future earnings. Our study documents how unequal priority of directorships affects the strength of accounting monitoring by the audit committee, and thus highlights the importance of considering the relative attention a firm will receive when selecting an audit committee director with multiple directorships.

Authors

• He Huang, Yeshiva University

• Gerald Lobo, University of Houston-Houston

• Chong Wang, University of Kentucky

• Jian Zhou, University of Hawaii-Manoa