The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0268-6902.htm

Independent
Independent audit committee audit committee
characteristics and real earnings characteristics
management
153
Jerry Sun and George Lan
Odette School of Business, University of Windsor, Windsor, Canada, and
Guoping Liu
Ted Rogers School of Management, Ryerson University, Toronto, Canada

Abstract
Purpose – The purpose of this study is to investigate the effectiveness of independent audit
committees in constraining real earnings management. This study examines the relationships between
audit committee characteristics and real activities manipulation.
Design/methodology/approach – US firms with stronger incentives to undertake real earnings
management are selected as a sample. Regressions are run for the empirical analyses.
Findings – It is found that audit committee members’ additional directorships are positively
associated with real earnings management measured by abnormal cash flows from operations,
abnormal discretionary expenses and abnormal production costs, suggesting that audit committees
with high additional directorships are less effective in constraining real earnings management. The
findings are consistent with the notion that audit committee members’ busyness impairs their
monitoring effectiveness.
Originality/value – This study extends the extant research on audit committees’ oversight of real
earnings management by using refined research design and updated data. This study also provides
further evidence on how audit committee members’ additional directorships affect their ability to
oversee both accrual and real earnings management.
Keywords Audit committee characteristics, Real earnings management
Paper type Research paper

1. Introduction
Earnings management can be categorized into accrual earnings management and real
earnings management, based on whether or not it leads to direct cash flow consequences.
Accrual earnings management is the managerial manipulation of earnings via
accounting estimates and methods, which has no direct impact on cash flows. By
contrast, real earnings management is the earnings manipulation through operational
activities, which directly affects cash flows. Relative to accrual earnings management,
real earnings management has received little attention in the literature. Recently,
Roychowdhury (2006) comprehensively investigates earnings management through
real activities manipulation. He develops empirical models to measure real earnings
management, and documents evidence that managers manipulate earnings by offering
price discounts or more lenient credit terms to increase sales, reducing discretionary
Managerial Auditing Journal
Vol. 29 No. 2, 2014
JEL classification – M41, M42, G34 pp. 153-172
q Emerald Group Publishing Limited
The authors appreciate financial support from the Odette School of Business and the 0268-6902
Ted Rogers School of Management. DOI 10.1108/MAJ-05-2013-0865
MAJ expenditures, or overproducing products to lower cost of goods sold. His findings
29,2 indicate that managers usually take three types of real activities manipulation, namely,
sales manipulation, reduction of discretionary expenditures, and overproduction.
A number of high profile corporate scandals (e.g. Enron, WorldCom, and Tyco
International) raised public concerns on the integrity of accounting information
disseminated in capital markets and the ethics of accounting practice and financial
154 reporting. To address these concerns, the passage of the Sarbanes-Oxley Act (SOX) in
July 2002 mandated sweeping changes in corporate governance requirements of US
listed companies to improve financial reporting quality. Cohen et al. (2008) examine real
and accrual earnings management in the pre- and post-SOX periods. They find that the
level of real earnings management has increased after the passage of SOX, while the
level of accrual earnings management has declined at the same time period. Their results
suggest that firms may switch from accrual to real earnings management, as the latter is
viewed as harder to detect and constrain. The tendency of using real activities methods
to manage earnings is a challenge to corporate governance practices in the post-SOX
period and increases ethics concerns on managerial behavior.
Existing literature suggests that real earnings management may lower firms’
investment efficiency (Cohen and Zarowin, 2008). Cohen and Zarowin (2010) show that
seasoned equity offering (SEO) firms experience a more severe decline in post-SEO
performance due to real earnings management than due to accrual earnings
management. Real earnings management may also negatively affect future operating
performance (Gunny, 2005) and consequently shareholders’ interests. Since the
responsibility of boards of directors is to act as the shareholders’ representative in all
matters, the board should oversee managers to constrain their real activities
manipulation. Although audit committees play a key role in the oversight of financial
reporting process, it is unclear as to whether audit committees can effectively constrain
real earnings management.
The purpose of this study is to investigate the effectiveness of independent audit
committees in constraining real earnings management, an issue becoming more crucial
in the post-SOX period. Specifically, this study examines whether real earnings
management is affected by five audit committee characteristics including:
(1) accounting financial expertise;
(2) board tenure;
(3) additional directorships;
(4) block shareholdings; and
(5) committee size.

Following Roychowdhury (2006), we use abnormal cash flows from operations,

abnormal discretionary expenses, and abnormal production costs to measure real
earnings management. We run regressions based on a sample of firms that are likely to
manipulate real activities to avoid reporting annual losses for years 2007-2010. We
document that real earnings management, measured by abnormal cash flows from
operations, abnormal discretionary expenses, or abnormal production costs, is
positively associated with audit committee members’ additional directorships. These
results suggest that audit committee members’ busyness may impair their effectiveness
in monitoring real activities manipulation. However, we find no evidence that the other Independent
four audit committee characteristics can affect real earnings management. audit committee
Our study contributes to the academic and practitioner literature in the following
ways. First, this study extends the extant research on audit committees’ oversight of real characteristics
earnings management by using refined research design and updated data. There is little
research that has comprehensively examined the effect of audit committee
characteristics on real earnings management. Second, this study provides further 155
evidence on how audit committee members’ additional directorships affect their ability
to oversee both accrual and real earnings management. We document that audit
committees with high additional directorships are less effective in constraining
abnormal discretionary expenses, abnormal cash flows from operation and abnormal
production costs. We also find the same effect of additional directorships on accrual
earnings management, although the existent literature shows mixed evidence.
Moreover, our findings provide implications for strengthening the role of independent
audit committees in monitoring real earnings manipulation.
The remainder of the paper is organized as follows. Section 2 provides a
background to the study and discusses the related literature. Section 3 develops the
hypotheses, followed by a description of the research design in Section 4. Section 5
analyzes and discusses the empirical results and Section 6 concludes the paper.

2. Background and literature review

There is a stream of research in the literature that examines the relation between audit
committee characteristics and audit committee effectiveness. Klein (2002) finds that high
audit committee independence (i.e. the proportion of independent directors on the audit
committee) leads to less accrual earnings management, suggesting that independent
audit committee members constrain earnings management. Bedard et al. (2004),
Krishnan and Visvanathan (2008) and Dhaliwal et al. (2010) find that audit committee
members’ accounting financial expertise can enhance financial reporting quality.
Beasley (1996) and Dhaliwal et al. (2010) document evidence on the positive association
between audit committee members’ board tenure and financial reporting quality.
Bedard et al. (2004) find that accrual earnings management is lower when audit
committee members’ board seats of other firms are high. Klein (2002) finds that outside
directors with block shareholdings are more effective in constraining accrual earnings
management. Vafeas (2005) contends that audit committee size may positively affect
audit committee effectiveness. While extant studies suggest that some audit committee
characteristics are related to constraining accrual earnings management and enhancing
financial reporting quality, it is unclear whether those characteristics can affect real
earnings management that is viewed as harder to be detected and constrained[1].
Managers can manipulate earnings by exercising discretion over accounting choices
(accrual earnings management) or by engaging in real economic activities (real earnings
management) with the intention to mislead stakeholders on the underlying economic
performance. Bruns and Merchant (1990) report that a vast majority of the 649 managers
in their survey use at least some methods to manipulate short-term earnings and that
there is a high tolerance for changing or manipulating operating decisions or procedures.
They argue that although managers view operating manipulations as a kind of
“victimless crime”, customers or even the corporation may be victims[2]. Bruns and
Merchant (1990) also find it is rare that companies provide complete disclosure on the
MAJ nature of sales and profits when these are borrowed from the future. The prevalence
29,2 of real earnings management is highlighted in a more recent survey and interview of
400 executives by Graham et al. (2005). It is documented that 80 percent of the surveyed
executives state that they would decrease R&D, advertising, or maintenance
expenditures to hit earnings targets, even though these actions could harm the firm
value in the long run. Graham et al. (2005) also indicate that financial executives are more
156 willing to manipulate earnings through real activities than to make within-GAAP
accounting adjustments (i.e. accruals) for delivering earnings.
Roychowdhury (2006) finds that managers manipulate real activities to avoid
reporting annual losses. Using zero earnings as the threshold and a large sample of
annual data over that include 36 industries and 4,252 individual firms over the
1987-2001 period, he documents evidence that firms try to avoid reporting losses in
three ways, namely, by:
(1) offering price discounts or more lenient credit terms to temporarily increase
sales;
(2) reducing discretionary expenses (such as R&D, advertising, and maintenance)
aggressively to improve reported margins; and
(3) overproducing to lower cost of goods sold (by allocating more overhead to
inventory and less to cost of goods sold and thus resulting in lower cost of
goods sold) and increase operating margins.

In addition, Roychowdhury 2006, p. 365 reports evidence of real earnings management

among firms trying to avoid negative annual forecast errors and finds a negative
association between institutional ownership and real activities manipulation. He
remarks:
[. . .] if the abnormal real activities that managers undertake to avoid losses represent optimal
responses to economic circumstances, it is difficult to explain why the presence of
sophisticated investors restricts such activities.
According to Zang (2012), managers may consider accrual manipulation and real
earnings management, as two substitute strategies and will weigh the costs and benefits
of each strategy before taking actions. She finds that real earnings management is
positively correlated with the costs of accrual manipulation, so that accrual and real
manipulation are negatively correlated. Cohen et al. (2008) investigate the impact of SOX
on both accrual and real earnings management. They document that real earnings
management has increased at the same time when accrual earnings management has
decreased after the passage of SOX. Their findings indicate that managers are inclined
to engage in more real earnings manipulation in the post-SOX period.
Cohen and Zarowin (2010) find that firms use real as well as accrual-based earnings
management tools around SEOs and that the choice of which tool to use depends on the
firm’s ability to use accrual accounting and the costs of doing so. They conclude that the
costs of real earnings management are likely greater than the costs of accrual earnings
management around SEO’s. Cohen and Zarowin (2008) suggest that real earnings
management leads to poor investment efficiency. Examining the consequences of
various types of real earnings management, Gunny (2005) finds that real earnings
management activities have a significant negative economic impact on future operating
performance. Mizik and Jacobson (2007) find evidence that some firms attempt to inflate
current-term earnings (and thereby stock price) at the time of SEOs through accrual and Independent
real activity earnings management. They conclude that the financial markets could not audit committee
properly value firms inflating earnings and that this mis-valuation (i.e. overvaluation) is
more closely linked to real activities manipulation than to accruals manipulation. characteristics
Overall, extant studies indicate negative economic consequences of real earnings
management. Since real earnings management also distorts financial reporting and an
important duty of board of directors and audit committees is to ensure the integrity of 157
financial reporting, boards and audit committees have the responsibility for
constraining real earnings manipulation (Kang and Kim, 2012; Hashemi and
Rabiee, 2011).
Although there is evidence that real earnings management is used by managers and
is detrimental to firms using it and their stakeholders, there is, to date, very little
empirical evidence on how audit committee characteristics affect real earnings
management. Carcello et al. (2008) use a sample of 350 firms in 2003 to examine the effect
of audit committee accounting financial expertise on abnormal production costs and
abnormal discretionary expenses. They find that although audit committee accounting
financial expertise has no association with abnormal production costs, it is positively
related to abnormal discretionary expenditures for firms with weak corporate
governance structures. Our study differs from Carcello et al. (2008) in the following
ways. First, we test multiple audit committee characteristics instead of a single
characteristic. Second, we employ a sample of firms with small positive earnings in
a recent four-year period of 2007-2010. Third, we also consider abnormal cash flows
from operations as a measure of real earnings management.
Visvanathan (2008) uses pre-SOX data to examine the association between real
earnings management and three audit committee characteristics including audit
committee independence, audit committee size and audit committee meeting frequency.
He finds that audit committee meeting frequency is negatively associated with real
earnings management through reduction of discretionary expenses, but not through
sales manipulation or overproduction. He also finds that audit committee size and audit
committee independence are not associated with the three measures of real earnings
management. Unlike Visvanathan (2008), our study addresses independent audit
committees’ multiple characteristics in the post-SOX period and selects sample firms
that are more likely to engage in real earnings management.
Garven (2009) examines whether audit committees characteristics are related to the
likelihood of small positive earnings and negative abnormal discretionary expenses,
both of which are used to identify firms engaging in real earnings management. Based
on a sample of 148 firm-year observations with small positive earnings and negative
abnormal discretionary expense for years 2005-2007, she documents marginally
significant evidence that firms whose audit committee members hold more outside
directorships are more likely to engage in real earnings management. Compared to
Garven’s (2009) study, we use different measures of real earnings management and
more recent data of firms with small positive earnings.
In summary, extant studies suggest that audit committees’ multiple characteristics
may affect the effectiveness of audit committees in the oversight of financial reporting
process. However, there is limited research into the relation between audit committee
characteristics and real earnings management, which is likely to be more salient in the
post-SOX period. Thus, it is warranted to conduct more research on this topic.
MAJ 3. Hypotheses
29,2 As an operating committee of the board of directors, the audit committee is in charge of
the oversight of financial report and disclosure. When audit committee members find
abnormal changes in revenue and expense items on the financial statements and
budgets, they should discuss these issues and review related business operations with
management. This aspect of the duties has been strengthened by SOX, which requires
158 audit committees to expand their understanding of the business beyond the core
competencies of accounting. Since audit committees’ duties involve the oversight of
real activities, there are expectations on audit committee members to constrain real
earnings management.
There are several audit committee characteristics that may affect the monitoring
effectiveness of audit committees. First, previous studies indicate that audit committee
members’ accounting financial expertise can facilitate the committee to more effectively
oversee financial reporting process. Bedard et al. (2004) find that aggressive earnings
management is negatively related to accounting expertise of audit committee members.
Krishnan and Visvanathan (2008) document evidence that accounting conservatism is
positively associated with audit committees’ accounting financial expertise.
Dhaliwal et al. (2010) find that accruals quality is higher for audit committees with at
least one accounting financial expert than other audit committees. As audit committee
members with accounting financial expertise are able to constrain accrual earnings
management more effectively, we conjecture that these committee members may also
have more knowledge about real earnings management and more experience on the
detection of real earnings management. Thus, our first hypothesis is as follows:
H1. Real earnings management is negatively associated with audit committees’
accounting financial expertise.
Second, audit committee members with long board tenure may have greater experience
and expertise on the oversight of financial reporting. Long board tenure directors gain
job-relevant knowledge over time (Fiedler, 1970), which can improve their job
performance. Since individuals’ actions become more committed when they are less
likely to reverse their job acceptance (Salancik, 1977; O’Reilly and Caldwell, 1981), long
board tenure directors may be more committed to their duties. Thus, audit committee
members with long board tenure, compared to those with short board tenure, may be
more effective in overseeing managers. On the other hand, long board tenure directors
are more likely to have friendly relations with managers who can influence the
nomination and re-appointment of directors, which may impair the monitoring
effectiveness of directors (Vafeas, 2003). Therefore, the higher monitoring effectiveness
resulting from the long board tenure directors’ experience and commitment could be
weakened by their amiable relations with the managers. Beasley (1996) finds that the
likelihood of financial reporting fraud is lower when firms have long average tenure of
outside directors. Bedard et al. (2004) document some evidence on a negative association
between aggressive earnings management and average board tenure of outside
directors on the audit committee. Dhaliwal et al. (2010) find that accruals quality is
positively related to average board tenure of audit committee members. These empirical
results suggest that long board tenure may positively affects directors’ monitoring
effectiveness on not only accrual but also real earnings management. Thus, the second
hypothesis is developed as follows:
 H2. Real earnings management is negatively associated with average board Independent
tenure of audit committee members. audit committee
Third, outside directors who serve on more corporate boards may gain greater characteristics
experience and expertise on overseeing managers (Bedard et al., 2004). These directors
may also have greater reputational capital that motivates them to work better
(Shivdasani, 1993). Bedard et al. (2004) find that aggressive earnings management is
negatively associated with the average number of directorships held by outside audit 159
committee members, suggesting that directors with high additional directorships are
more effective in constraining earnings management. However, Core et al. (1999) and
Fich and Shivdasani (2006) indicate that directors who serve on more additional boards
are busy and thereby become less effective monitors. Similarly, it could be an empirical
question whether directors with high additional directorships have higher or lower
monitoring effectiveness on real earnings management. The third hypothesis is
formulated as follows:
H3. Real earnings management is associated with the average number of
additional boards held by audit committee members.
Fourth, outside directors with high shareholdings have greater incentives to monitor
managers because directors’ equity holdings represent a mechanism to align the
interests of outside directors to the interests of shareholders (Shivdasani, 1993). Klein
(2002) examines whether directors’ block shareholdings affect earnings management,
and finds that accrual earnings management is lower when there are outside directors
with block shareholdings. Consistently, we conjecture that directors’ block
shareholdings can lead to higher monitoring effectiveness on real earnings
management. We develop the fourth hypothesis as follows:
H4. Real earnings management is negatively associated with audit committees’
block shareholdings.
Fifth, adding more members to audit committees can ensure a sufficient knowledge
base, and reduce the possibility of the committee as a whole being significantly
influenced by managers (Vafeas, 2005). Large audit committees are more likely to have
members with varied expertise to monitor financial reporting practices more
effectively (Baxter and Cotter, 2009). However, large audit committees may face the
free riding problem that can reduce their monitoring effectiveness (Lipton and Lorsch,
1992). Hence, we develop the fifth hypothesis as follows:
H5. Real earnings management is associated with audit committee size.

4. Research design
4.1 Sample selection
We begin to select firms included in the S&P 1500 index from the Compustat
Execucomp database for years 2007-2010 as CEO tenure needs to be computed using
the CEO data from this database. The Compustat Execucomp database provides the
data on CEO compensation, shareholding, beginning year of being CEO, etc. for those
firms. This procedure yields a raw sample of 5,037 firm-year observations. Next,
we collect the data from the Compustat North America database and the CRSP database
to compute all dependent and independent variables used in the regression analysis.
MAJ After the elimination of observations with missing data, the sample size is reduced to
29,2 3,436 firm-year observations. Like Roychowdhury (2006), we delete firms in regulated
industries (SIC codes between 4400 and 5000) and banks and financial institutions
(SIC codes between 6000 and 6500) to further reduce the sample to 3,136 firm-year
observations. As Roychowdhury (2006) finds that firms manipulate real activities to
avoid reporting annual losses, we restrict the sample to firms with small positive
160 earnings[3]. This yields a final sample of 100 firm-year observations for years 2007-2010.
We manually collect the data on audit committee and board characteristics by reviewing
proxy statements downloaded from the EDGAR database for these 100 firm-year
observations. Panel A of Table I reports the sample breakdown by year. There are 18, 24,
38 and 20 firms in 2007, 2008, 2009 and 2010, respectively. Panel B of Table I reports
that there are 58 firm-year observations in manufacturing industries and 42 firm-year
observations in non-manufacturing industries.

4.2 Measurement of real earnings management

Like Roychowdhury (2006), we consider three real earnings manipulation approaches:
(1) sales manipulation;
(2) reduction of discretionary expenditures; and
(3) overproduction.

Sales manipulation means that managers attempt to temporarily increase sales during
the year by offering price discounts or more lenient credit terms. Reduction of
discretionary expenditures means that managers reduce discretionary expenditures
such as advertising expenses, R&D expenses, and selling, general and administrative
expenses to increase earnings. Overproduction means that managers increase earnings
by producing more units of goods than necessary to lower fixed costs per unit and
thereafter cost of goods sold.
Offering price discounts to increase sales results in lower margins. As margins decline,
the cash inflow per sale becomes lower. Similarly, offering more lenient credit terms like
lower interest rates (zero-percent financing) leads to lower cash inflow. Thus, sales
manipulation activities are associated with lower current-period cash flows from
operations than what is normal given the sales level. Our first measure of real earnings
management is abnormal cash flows from operations (ACFOt), which are estimated using
the following cross-sectional regression for every two-digit SIC industry and year[4]:

Frequency %

Panel A: by year
2007 18 18.00
2008 24 24.00
2009 38 38.00
2010 20 20.00
Total 100 100.00
Panel B: by industry
Manufacturing 58 58.00
Table I. Non-manufacturing 42 42.00
Sample breakdown Total 100 100.00
 CFOt =TAt21 ¼ a0 ð1=TAt21 Þ þ a1 ðSALES t =TAt21 Þ þ a2 ðDSALES t =TAt21 Þ þ 1 ð1Þ Independent
where CFOt is cash flows from operations. TAt2 1 is the total assets at the beginning of audit committee
year. SALESt is sales. DSALESt is the change in sales. After the estimation of parameters characteristics
in equation (1), ACFOt is measured as the residual value of equation (1). Since the signed
value of abnormal cash flows from operations decreases with sales manipulation, a high
value of ACFOt indicates low real earnings management. 161
Managers may reduce discretionary expenditures to increase earnings as these
expenditures are generally expensed in the same period that they are incurred[5]. Firms
that opportunistically cut discretionary expenditures will have unusually lower
discretionary expenses. Following Roychowdhury (2006), we measure discretionary
expenditures as the sum of advertising expenses, R&D expenses, and selling, general
and administrative expenses. To disentangle the abnormal part of discretionary
expenditures, we run the following regression for every two-digit SIC industry and year:

DISX t =TAt21 ¼ a0 ð1=TAt21 Þ þ a1 ðSALES t21 =TAt21 Þ þ 1 ð2Þ

where DISXt is discretionary expenses. SALESt2 1 is lagged sales. Our second measure
of real earnings management is abnormal discretionary expenses (ADISXt), which are
obtained using the residual value of equation (2). As a reduction of discretionary
expenditures leads to lower values of abnormal discretionary expenses, a high value of
ADISXt reflects lower real earning management.
Firms may produce more units of good than necessary to increase earnings because
such activities can reduce the cost of goods sold. When goods are overproduced, lower cost
of goods sold is caused by spreading fixed overhead costs over a larger number of units.
It is expected that the level of production costs will be abnormally high if managers
manipulate earnings by overproduction[6]. Similar to Roychowdhury (2006), we define
production costs as the sum of cost of goods sold and change in inventory. We estimate
the following regression model to compute abnormal production costs (APRODt):
PRODt =TAt21 ¼ a0 ð1=TAt21 Þ þ a1 ðSALES t =TAt21 Þ þ a2 ðDSALESt =TAt21 Þ
ð3Þ
þ a3 ðDSALES t21 =TAt21 Þ þ 1
where PRODt is production costs. DSALESt2 1 is lagged change in sales. equation (3)
is also estimated for every two-digit SIC industry and year. Our third measure of
real earnings management is abnormal production costs, which are measured as the
residual value of equation (3). A high value of APRODt indicates high real earnings
management because overproduction leads to higher value of abnormal production costs.

4.3 Regression model

We test the association between real earnings management and audit committee
characteristics by estimating the following regression model:

REDt ¼ b0 þ b1 ACEXP t þ b2 ACTEN t þ b3 ACOTH t þ b4 ACBLK t

þ b5 ACSIZE t þ b6 BDINDt þ b7 BDEXP t þ b8 BDTEN t þ b9 BDOTH t
ð4Þ
þ b10 BDBLK t þ b11 BDSIZE t þ b12 SIZE t þ b13 MBt þ b14 ROAt
þ b15 CEOTEN t þ b16 AGE t þ 1
MAJ where:
29,2 REMt ¼ real earnings management, measured as abnormal cash flows from
operations, abnormal discretionary expenses, or abnormal
production costs.
ACEXPt ¼ proportion of audit committee members with accounting financial
162 expertise.
ACTENt ¼ average board tenure of audit committee members.
ACOTHt ¼ average number of other S&P companies’ boards served on by audit
committee members.
ACBLKt ¼ proportion of audit committee members with block shareholding.
ACSIZEt ¼ audit committee size, measured as the number of audit committee
members.
BDINDt ¼ board independence, measured as the proportion of independent
directors on the board.
BDEXPt ¼ proportion of directors with accounting financial expertise on the
board.
BDTENt ¼ average board tenure of directors.
BDOTHt ¼ average number of other S&P companies’ boards served on by
directors.
BDBLKt ¼ proportion of block shareholding directors on the board.
BDSIZEt ¼ board size, measured as the number of directors on the board.
SIZEt ¼ firm size, measured as the nature log of market value of common
equity.
MBt ¼ market-to-book ratio, measured as the ratio of market value to book
value of common equity.
ROAt ¼ return on assets, measured as income before extraordinary items
divided by total assets.
CEOTENt ¼ CEO tenure, measured as the number of years for which an
employee has been the company’s CEO.
AGEt ¼ firm age, measured as the number of years for which a firm has been
included in the CRSP database.
Like Krishnan and Visvanathan (2008), we define an audit committee member with
accounting financial expertise as a director who is or was a member of one of the
following groups: certified public accountants, auditors, principal or chief financial
officers, controllers, or principal or chief accounting officers[7]. An audit committee
member with block shareholdings is defined as a director who owns at least 1 percent of
common equity.
 Corresponding to the five audit committee characteristics that are test variables of Independent
interest, we include five board characteristics in equation (4), to mitigate the concern that audit committee
the observed association between audit committee characteristics and real earnings
management may reflect a mechanical correlation between board characteristics and real characteristics
earnings management. As board independence is usually a proxy for board governance
quality (Klein, 2002), we add BDINDt in the model[8]. Following Roychowdhury (2006),
we use SIZEt, MBt and ROAt as control variables. We include CEOTENt in the model 163
because more experienced CEOs may have ability to predict demand, and thus are less
likely to over-produce. Audit committee characteristics are likely to be correlated with firm
age, which may impact the predictability of demand. Thus, we add AGEt in the model.
To control for firm effects, we estimate equation (4) with standard errors clustered by firm.

5. Empirical results
We report descriptive statistics in Table II. The mean, median, Q1 and Q3 are 0.018,
0.016, 2 0.016, 2 0.054 for ACFOt, 2 0.018, 2 0.011, 2 0.081, 0.070 for ADISXt and
0.013, 2 0.002, 2 0.087, 0.116 for APRODt, respectively. All the three dependent
measures have kurtosis of less than 3 indicating that their distributions have thicker
tails and a lower peak compared to a normal distribution. We find that ACFOt and
APRODt pass most of normality tests whereas ADISXt does not. On average, audit
committees are composed of 3.78 directors. Approximately 42.6 percent of audit
committee members are accounting financial experts, and the average board tenure
of audit committee members is about 8.8 years. The average number of other S&P
companies’ boards served on by audit committee members is 0.908. Only 2.8 percent of
audit committee members are block shareholders. Overall, audit committees of our
sample firms have similar size, longer average board tenure and lower additional
directorships compared to Dhaliwal et al. (2010).
Table III presents variance inflation factors for all independent variables. We find
two variance inflation factors that are greater than 10, specifically, 16.101 for ACEXPt
and 15.914 for BDEXPt. Since it seems that ACEXPt and BDEXPt reflect the same
construct, we exclude BDEXPt from the model to mitigate this multicollinearity issue.
Table IV provides the results when abnormal cash flows from operations are used
as the dependent variable. We find a significant negative coefficient on ACOTHt
(t-statistic ¼ 2 3.92, p-value , 0.01). This finding suggests that even if audit
committees’ additional directorships may increase expertise and reputational capital
that is helpful for monitoring real earnings management, this positive effect is weaker
than the negative effect of increasing busyness and thus impeding the detection of real
earnings management. We find marginal evidence that the coefficient on ACBLKt is
negative and significant (t-statistic ¼ 2 1.80, p-value , 0.10), contrary to the notion
that block shareholding directors are more effective monitors. Interestingly, the
coefficient on BDOTHt is positive and significant (t-statistic ¼ 2.69, p-value , 0.01).
It seems that directors’ busyness due to additional directorships is less harmful to boards
than to audit committees. We also find a significant negative coefficient on BDSIZEt
(t-statistic ¼ 22.25, p-value , 0.05), indicating that the monitoring effectiveness of
boards decreases as the size of the boards increases, possibly because large boards may
have free riders.
Table V reports the results when we use abnormal discretionary expenses as the
dependent variable. We find a negative and significant coefficient for ACOTHt
MAJ
Variable Mean Median SD Q1 Q3
29,2
ACFOt 0.018 0.016 0.055 2 0.016 0.054
ADISXt 20.018 2 0.011 0.155 2 0.081 0.070
APRODt 0.013 2 0.002 0.143 2 0.087 0.116
AACt 20.000 2 0.005 0.066 2 0.040 0.040
164 ACEXPt 0.426 0.333 0.325 0.200 0.667
ACTENt 8.808 8.225 3.636 6.633 10.000
ACOTHt 0.908 0.800 0.572 0.500 1.200
ACBLKt 0.028 0.000 0.100 0.000 0.000
ACSIZEt 3.780 4.000 1.021 3.000 4.000
BDINDt 0.782 0.809 0.114 0.714 0.875
BDEXPt 0.184 0.143 0.138 0.106 0.279
BDTENt 9.602 9.226 3.597 6.746 11.742
BDOTHt 0.853 0.778 0.466 0.250 1.236
BDBLKt 0.150 0.143 0.134 0.000 0.270
BDSIZEt 8.730 9.000 2.269 7.000 10.000
SIZEt 2,561.015 729.506 3,929.000 336.372 2,633.292
MBt 1.482 1.297 0.672 0.961 1.947
ROAt 0.005 0.006 0.003 0.002 0.008
CEOTENt 8.725 6.000 7.773 3.000 12.000
AGEt 29.800 22.000 21.262 13.000 41.500
Notes: n ¼ 100; definition of variables: ACFOt – abnormal cash flows from operations, measured as
the residual value of equation (1), ADISXt – abnormal discretionary expenses, measured as the
residual value of equation (2), APRODt – abnormal production costs, measured as the residual value of
equation (3), AACt – abnormal accruals, measured as the residual value of the Jones model, ACEXPt –
proportion of audit committee members with accounting financial expertise, ACTENt – average board
tenure of audit committee members, ACOTHt – average number of other S&P companies’ boards
served on by audit committee members, ACBLKt – proportion of audit committee members with block
shareholding, ACSIZEt – audit committee size, measured as the number of audit committee members,
BDINDt – board independence, measured as the proportion of independent directors on the board,
BDEXPt – proportion of directors with accounting financial expertise on the board, BDTENt –
average board tenure of directors, BDOTHt – average number of other S&P companies’ boards served
on by directors, BDBLKt – proportion of block shareholding directors on the board, BDSIZEt – board
size, measured as the number of directors on the board, SIZEt – firm size, measured as the nature log
of market value of common equity, MBt – market-to-book ratio, measured as the ratio of market value
Table II. to book value of common equity, ROAt – return on assets, measured as income before extraordinary
Descriptive statistics items divided by total assets, CEOTENt – CEO tenure, measured as the number of years for which an
of dependent and employee has been the company’s CEO, AGEt – firm age, measured as the number of years for which a
independent variables firm has been included in the CRSP database

(t-statistic ¼ 2 2.09, p-value , 0.05), which corroborates the results on abnormal cash
flows from operations. Thus, audit committee members’ busyness may impair their
ability to constrain real earnings management. Unlike the results on abnormal cash
flows from operations, the coefficients on ACBLKt, BDOTHt and BDSIZEt are
insignificant, suggesting that these characteristics are not systematically associated
with real earnings management.
Table VI presents the results when abnormal production costs are used as the
dependent variable. We document a positive and significant coefficient on ACOTHt
(t-statistic ¼ 2.39, p-value , 0.05), consistent with the results on abnormal cash flows
from operations and abnormal discretionary expenses. Thus, audit committees with
 Independent
Variable Variance inflation factor
audit committee
ACEXPt 16.101 characteristics
ACTENt 2.292
ACOTHt 2.321
ACBLKt 1.633
ACSIZEt 2.589 165
BDINDt 2.374
BDEXPt 15.914
BDTENt 3.504
BDOTHt 2.598
BDBLKt 2.262
BDSIZEt 3.642
SIZEt 1.984
MBt 1.402
ROAt 1.163
CEOTENt 1.587 Table III.
AGEt 1.654 Variance inflation factor
(VIF) – tests of
Note: The variables are defined in Table II multicollinearity

Variable Coefficient t-statistic

Intercept 20.089 2 1.13

ACEXPt 0.002 0.12
ACTENt 0.001 0.64
ACOTHt 20.043 2 3.92 * * *
ACBLKt 20.121 2 1.80 *
ACSIZEt 20.005 2 0.99
BDINDt 0.118 1.64
BDTENt 0.000 0.02
BDOTHt 0.042 2.69 * * *
BDBLKt 0.047 0.93
BDSIZEt 20.007 2 2.25 * *
SIZEt 0.015 3.05 * * *
MBt 0.003 3.60 * * *
ROAt 23.261 2 1.76 *
CEOTENt 0.000 0.58
AGEt 20.000 2 1.21
n 100
F-statistic 3.73 * * *
Adj. R 2 14.90%
Notes: Significant at: *10, * *5 and * * *1 percent levels (two-tailed tests); regression model:
Table IV.
APRODt ¼ b0 þ b1 ACEXP t þ b2 ACTEN t þ b3 ACOTH t þ b4 ACBLK t þ b5 ACSIZE t Regression results for
þ b6 BDINDt þ b7 BDEXP t þ b8 BDTEN t þ b9 BDOTH t þ b10 BDBLK t þ b11 BDSIZE t real earnings
þ b12 SIZE t þ b13 MBt þ b14 ROAt þ b15 CEOTEN t þ b16 AGE t þ 1 management measured
by abnormal cash flows
the variables are defined in Table II from operations
MAJ
Variable Coefficient t-statistic
29,2
Intercept 0.071 0.33
ACEXPt 2 0.010 20.19
ACTENt 2 0.002 20.24
ACOTHt 2 0.073 22.09 *
166 ACBLKt 0.228 1.59
ACSIZEt 2 0.021 21.27
BDINDt 2 0.036 20.18
BDTENt 0.001 0.14
BDOTHt 0.054 1.11
BDBLKt 2 0.054 20.33
BDSIZEt 0.009 0.89
SIZEt 2 0.005 20.43
MBt 0.040 1.62
ROAt 2 3.444 20.57
CEOTENt 0.001 0.28
AGEt 2 0.001 21.35
n 100
F-statistic 3.13 * *
Adj. R 2 2.01%
Notes: Significant at: *5 and * *1 percent levels (two-tailed tests); regression model:
Table V. ADISX t ¼ b0 þ b1 ACEXP t þ b2 ACTEN t þ b3 ACOTH t þ b4 ACBLK t þ b5 ACSIZE t
Regression results for real þ b6 BDINDt þ b7 BDEXP t þ b8 BDTEN t þ b9 BDOTH t þ b10 BDBLK t þ b11 BDSIZE t
earnings management þ b12 SIZE t þ b13 MBt þ b14 ROAt þ b15 CEOTEN t þ b16 AGE t þ 1
measured by abnormal
discretionary expenses the variables are defined in Table II

high additional directorships are less effective in constraining real earnings

management. We find marginal evidence that the coefficient on BDOTHt is negative
and significant (t-statistic ¼ 2 1.89, p-value , 0.10), consistent with the results on
abnormal cash flows from operations. These results suggest that directors’ busyness
inhibits the monitoring effectiveness for audit committees more than it does for boards.
In summary, we document systematic evidence that audit committee members’ high
additional directorships impede their effectiveness in constraining real earnings
management. An implication of our findings to stakeholders is that it is essential to
appoint directors with fewer additional directorships as audit committee members for
the purpose of constraining real earnings management.
We also conduct several additional analyses as follows. First, we re-estimate equation (4)
by using abnormal accruals as the dependent variable. Since Zang (2012) indicates that real
activities manipulation is a substitute for accrual earnings management, it is likely that the
observed positive association between audit committees’ additional directorships and real
earnings management is simply caused by a negative association between the additional
directorships and accrual earnings management. Table VII reports the results when the
dependent variable is abnormal accruals. We find that the coefficient on ACOTHt is
positive and significant (t-statistic ¼ 2.44, p-value , 0.05). Thus, audit committees’ high
additional directorships are associated with an increase of both real and accrual earnings
management.
 Independent
Variable Coefficient t-statistic
audit committee
Intercept 0.158 0.84 characteristics
ACEXPt 20.014 2 0.29
ACTENt 0.005 0.82
ACOTHt 0.073 2.39 * *
ACBLKt 0.089 0.63 167
ACSIZEt 0.023 1.58
BDINDt 20.181 2 1.01
BDTENt 20.005 2 0.63
BDOTHt 20.086 2 1.89 *
BDBLKt 20.141 2 0.98
BDSIZEt 20.005 2 0.64
SIZEt 0.002 0.19
MBt 20.041 2 1.70 *
ROAt 4.995 0.93
CEOTENt 20.002 2 0.89
AGEt 0.001 1.42
n 100
F-statistic 2.29 * * *
Adj. R 2 4.74%
Notes: Significant at: *10, * *5 and * * *1 percent levels (two-tailed tests); regression model:
ADISX t ¼ b0 þ b1 ACEXP t þ b2 ACTEN t þ b3 ACOTH t þ b4 ACBLK t þ b5 ACSIZE t Table VI.
þ b6 BDINDt þ b7 BDEXP t þ b8 BDTEN t þ b9 BDOTH t þ b10 BDBLK t þ b11 BDSIZE t Regression results for real
þ b12 SIZE t þ b13 MBt þ b14 ROAt þ b15 CEOTEN t þ b16 AGE t þ 1 earnings management
measured by abnormal
the variables are defined in Table II production costs

Second, we re-estimate equation (4) by using the lagged variables of earnings management
as the dependent variable. We conduct this additional analysis because audit committee
characteristics of the current year may reflect audit committee quality of the previous year
given that the committee has not changed for the current year. We still find a negative and
significant coefficient on ACOTHt for abnormal cash flows from operations (non-tabulated
t-statistic ¼ 21.89) and a positive and significant coefficient on ACOTHt for abnormal
accruals (non-tabulated t-statistic ¼ 1.82). In addition, we find a negative coefficient on
ACOTHt for abnormal discretionary expenses, which is significant for the one-tailed test
(non-tabulated t-statistic ¼ 21.53) and a positive coefficient on ACOTHt for abnormal
product costs. Overall, these findings tend to support the main results.
Third, we examine whether the results are sensitive to industry. We classify firm-year
observations into two industry categories: manufacturing vs non-manufacturing
industry. The industry dummy variable is coded 1 for an observation in manufacturing
industry and 0 otherwise. We run the regression analysis by adding the dummy variable
and its interaction with ACOTHt. None of the coefficients on the interactive term are
significant, thus implying that our findings are not sensitive to industry.

6. Conclusions
This study investigates the association between real earnings management and five audit
committee characteristics including accounting financial expertise, board tenure,
MAJ
Variable Coefficient t-statistic
29,2
Intercept 0.084 0.78
ACEXPt 0.008 0.31
ACTENt 2 0.000 20.01
ACOTHt 0.034 2.44 *
168 ACBLKt 0.068 0.94
ACSIZEt 0.008 1.06
BDINDt 2 0.085 20.81
BDTENt 0.001 0.43
BDOTHt 2 0.026 21.35
BDBLKt 2 0.065 21.01
BDSIZEt 0.006 1.48
SIZEt 2 0.015 22.57 *
MBt 2 0.007 20.65
ROAt 1.843 0.75
CEOTENt 2 0.001 20.69
AGEt 2 0.000 20.08
n 100
F-statistic 1.78 *
Adj. R 2 0.42%
Notes: Significant at: *5 percent level (two-tailed tests); regression model:
Table VII. AAC t ¼ b0 þ b1 ACEXP t þ b2 ACTEN t þ b3 ACOTH t þ b4 ACBLK t þ b5 ACSIZE t þ b6 BDINDt
Regression results þ b7 BDEXP t þ b8 BDTEN t þ b9 BDOTH t þ b10 BDBLK t þ b11 BDSIZE t þ b12 SIZE t
for accrual earnings þ b13 MBt þ b14 ROAt þ b15 CEOTEN t þ b16 AGE t þ 1
management measured
by abnormal accruals the variables are defined in Table II

additional directorships, block shareholdings, and committee size. We measure real

earnings management as abnormal cash flows from operations, abnormal discretionary
expenses, or abnormal production costs. We document evidence that audit committees
with high additional directorships are less effective in constraining real earnings
management. The results are consistent with the notion that audit committee members’
busyness impairs their monitoring effectiveness. As real earnings management is
opaque and hard to detect, independent audit committee directors serving on several
committees may not have sufficient time to gather firm-specific knowledge necessary
for identifying deviations from normal practice, in order to detect and constrain real
earnings management. Nevertheless, we find no significant evidence on the relationships
between real earnings management and the other audit committee characteristics
considered in this study.
This study extends the research into audit committees’ oversight of real earnings
management. Carcello et al. (2008) examine the effect of audit committee financial
expertise on real earnings management and document insignificant evidence. Similarly,
we find an insignificant relationship between audit committee financial expertise and
real earnings management even though our study controls for multiple audit
committees’ characteristics and uses a sample of firms whose managers have incentives
to manipulate real activities in order to avoid reporting annual losses. Although Garven
(2009) employs a sample of firms with small positive earnings, which are similar to our
sample firms, she only considers abnormal discretionary expenses when identifying Independent
firms engaging in real earnings management. She documents marginally significant audit committee
evidence that audit committees’ additional directorships are positively associated with
real earnings management measured only by abnormal discretionary expenses. characteristics
Compared to her study, our study provides systematic evidence that audit committees
with high additional directorships are less effective in constraining real earnings
management measured by abnormal cash flows from operations, abnormal 169
discretionary expenses, or abnormal production costs whatsoever.
This study also adds to the debate on whether high additional directorships increase
or decrease the monitoring effectiveness of directors. We provide further evidence that
audit committee members with high additional directorships are less effective in
constraining accrual earnings management. Hence, as an input to the debate on this
issue, our study provides different evidence to the existing studies. For example,
Bedard et al. (2004) find that firms are less likely to undertake accrual earnings
management when their audit committee members have high additional directorships,
whereas Dhaliwal et al. (2010) document insignificant evidence on the association
between audit committees’ additional directorships and accruals quality.
Real earnings management is found to be associated with additional directorships in
our study; however, it is not affected by the other audit committee characteristics.
An implication of this finding is that the oversight of real activities may need
independent directors to expend more effort and have board informativeness (Chen et al.,
2013). To enhance the effectiveness of audit committees in constraining real earnings
management, shareholders and boards of directors could consider directors’ busyness
when appointing audit committee members. Another implication is that the role of
independent audit committees in monitoring real activities has not been emphasized
adequately. Regulators and stock exchanges may consider this issue while regulating
corporate governance.
Like other studies, this study has its own caveats as follows. First, we develop the
hypotheses based on an implicit assumption that the costs of real earnings management
to shareholders will also be costly to independent directors (e.g. litigation and
reputational losses). However, the purpose of this study is not to provide direct evidence
on this linkage. This issue could be considered for future research. Second, we sacrifice
the sample size by restricting the sample to firms with small positive earnings. Future
research may enlarge the sample size by exploring alternative approaches to identifying
firms that are likely to engage in real activities manipulation.

Notes
1. Kothari et al. (2012) argue that real earnings management is easier to camouflage as normal
activities compared to accrual earnings management, because the former manifests from
managers’ investment and operating decisions while the latter can be detected by checking
whether firms’ accounting practices meet generally accepted accounting principles (GAAP).
Lo (2008, p. 353) states that managers believe real earnings management is harder to detect
because “with the uncertainty inherent in business environments, there is no benchmark to
determine what should have been done under any particular situation”.
2. For example, Bruns and Waterhouse (1975) mention that in the case of an early shipment
and sales shortfall, the product shipped may be of lower quality and the company will end up
paying for bad shipments eventually.
MAJ 3. Firms with small positive earnings are firms whose income before extraordinary items
divided by total assets is greater than 0 but less than 0.01.
29,2
4. The equation is estimated based on all observations in the Compustat North America
database. Following Roychowdhury (2006), we estimate the equation by requiring at least
15 firms in a two-digit SIC industry and year.
5. We assume that these expenditures do not generate immediate revenues or income.
170 6. We acknowledge that sales manipulation, reduction of discretionary expenditure, and
overproduction sometimes could be normal activities of managerial decision making and
may not arise from earnings management.
7. After the enactment of the SOX Act, US Stock Exchanges require all listed firm to have at
least one accounting financial expert on the audit committee. However, no stock exchanges
provide a specific definition of accounting financial expertise. Thus, listed firms can define a
director as an accounting financial expert based on their own criteria, which might be
different from our definition of expertise.
8. We do not consider audit committee independence because audit committees of all listed
companies in USA are fully independent after the enactment of SOX.

References
Baxter, P. and Cotter, J. (2009), “Audit committees and earnings quality”, Accounting and
Finance, Vol. 49, pp. 267-290.
Beasley, M.S. (1996), “An empirical analysis of the relation between the board of director
composition and financial statement fraud”, The Accounting Review, Vol. 71, pp. 443-465.
Bedard, J., Chtourou, S.M. and Courteau, L. (2004), “The effect of audit committee expertise,
independence, and activity on aggressive earnings management”, Auditing: A Journal of
Practice & Theory, Vol. 23, pp. 13-35.
Bruns, W.J. and Merchant, K.A. (1990), “The dangerous morality of managing earnings”,
Management Accounting, Vol. 72, pp. 22-25.
Bruns, W.J. and Waterhouse, J.H. (1975), “Budgetary control and organization structure”, Journal
of Accounting Research, Vol. 13, pp. 177-203.
Carcello, J., Hollingsworth, C., Klein, A. and Neal, T. (2008), “Audit committee financial expertise,
competing corporate governance mechanisms, and earnings management”, working
paper, University of Tennessee, Knoxville, TN.
Chen, J.Z., Cussatt, M. and Gunny, K.A. (2013), “Can a less independent board be more effective at
monitoring? Evidence from real activities manipulation”, working paper, University of
Colorado at Boulder, Boulder, CO.
Cohen, D.A. and Zarowin, P. (2008), “Economic consequences of real and accrual-based earnings
management activities”, working paper, New York University, New York, NY.
Cohen, D.A. and Zarowin, P. (2010), “Accrual-based and real earnings management activities
around seasoned equity offerings”, Journal of Accounting and Economics, Vol. 50, pp. 2-19.
Cohen, D.A., Dey, A. and Lys, T. (2008), “Real and accrual-based earnings management in the
pre- and post-Sarbanes Oxley periods”, The Accounting Review, Vol. 82, pp. 757-787.
Core, J., Holthausen, R. and Larcker, D. (1999), “Corporate governance, chief executive officer
compensation, and firm performance”, Journal of Financial Economics, Vol. 51, pp. 371-406.
Dhaliwal, D., Naiker, V. and Navissi, F. (2010), “The association between accruals quality and the
characteristics of accounting experts and mix of expertise on audit committees”,
Contemporary Accounting Research, Vol. 27, pp. 787-827.
Fich, E.M. and Shivdasani, A. (2006), “Are busy boards effective monitors?”, Journal of Finance, Independent
Vol. 61, pp. 689-724.
audit committee
Fiedler, F.E. (1970), “Leadership experience and leader performance – another hypothesis shot to
hell”, Organizational Behavior and Human Performance, Vol. 5, pp. 1-14. characteristics
Garven, S.A. (2009), “The effect of board and audit committee characteristics on real earnings
management: do boards and audit committees play a role in its constraint?”, working
paper, University of Alabama, Tuscaloosa, AL. 171
Graham, J.R., Harvey, C. and Rajgopal, S. (2005), “The economic implications of corporate
financial reporting”, Journal of Accounting and Economics, Vol. 40, pp. 3-73.
Gunny, K. (2005), “What are the consequences of real earnings management?”, working paper,
University of California, Berkeley, CA.
Hashemi, S.A. and Rabiee, H. (2011), “The role of corporate governance in real earnings
management: evidence from Iran”, Interdisciplinary Journal of Contemporary Research in
Business, Vol. 3, pp. 848-857.
Kang, S.-A. and Kim, Y.-S. (2012), “Effect of corporate governance on real activity-based earnings
management: evidence from Korea”, Journal of Business Economics and Management,
Vol. 13, pp. 29-52.
Klein, A. (2002), “Audit committee, board of director characteristics, and earnings management”,
Journal of Accounting and Economics, Vol. 33, pp. 375-400.
Kothari, S.P., Mizik, N. and Roychowdhury, S. (2012), “Managing for the moment: the role of real
activity versus accruals earnings management in SEO valuation”, working paper,
Massachusetts Institute of Technology, Cambridge, MA.
Krishnan, G. and Visvanathan, G. (2008), “Does the SOX definition of an accounting expert
matter? The association between audit committee directors’ accounting expertise and
accounting conservatism”, Contemporary Accounting Research, Vol. 25, pp. 827-857.
Lipton, M. and Lorsch, J.W. (1992), “A modest proposal for improved corporate governance”,
Business Lawyer, Vol. 1, pp. 59-77.
Lo, K. (2008), “Earnings management and earnings quality”, Journal of Accounting and
Economics, Vol. 45, pp. 350-359.
Mizik, N. and Jacobson, R.L. (2007), “Myopic marketing management: evidence of the
phenomenon and its long-term performance consequences in the SEO context”, Marketing
Science, Vol. 26 No. 3, pp. 361-379.
O’Reilly, C.A. and Caldwell, D.F. (1981), “The commitment and job tenure of new employees:
some evidence of postdecisonal justification”, Administrative Science Quarterly, Vol. 26,
pp. 597-616.
Roychowdhury, S. (2006), “Earnings management through real activities manipulation”,
Journal of Accounting and Economics, Vol. 42, pp. 335-370.
Salancik, G. (1977), “Commitment and control of organizational behaviour and belief”,
New Directions in Organizational Behaviour, St Claire Press, Chicago, IL.
Shivdasani, A. (1993), “Board composition, ownership structure, and hostile takeovers”,
Journal of Accounting and Economics, Vol. 16, pp. 167-198.
Vafeas, N. (2003), “Length of board tenure and outside director independence”, Journal of
Business Finance & Accounting, Vol. 30, pp. 1043-1064.
Vafeas, N. (2005), “Audit committees, boards, and the quality of reported earnings”,
Contemporary Accounting Research, Vol. 22, pp. 1093-1122.
MAJ Visvanathan, G. (2008), “Corporate governance and real earnings management”, Academy of
Accounting and Financial Studies Journal, Vol. 12, pp. 9-22.
29,2 Zang, A.Z. (2012), “Evidence on the trade-off between real activities manipulation and
accrual-based earnings management”, The Accounting Review, Vol. 87, pp. 59-86.

Further reading
172 Bowen, R., DuCharme, L. and Shores, D. (1995), “Stakeholders’ implicit claims and accounting
method choice”, Journal of Accounting and Economics, Vol. 20, pp. 255-295.
Setia-Atmaja, L.Y. (2009), “Governance mechanisms and firm value: the impact of ownership
concentration and dividends”, Corporate Governance: An International Review, Vol. 17,
pp. 694-709.

About the authors

Jerry Sun is an Associate Professor of accounting at the University of Windsor. He received his
PhD from the University of Auckland. His research interests include financial reporting quality,
corporate governance, and archival auditing research. He has published in academic journals
including Managerial Auditing Journal, Auditing: A Journal of Practice & Theory, Accounting
Horizons, and Journal of Accounting and Public Policy. Jerry Sun is the corresponding author and
can be contacted at: jyksun@uwindsor.ca
George Lan is a Full Professor of accounting at the University of Windsor. He got his PhD
from Queen’s University. His research interests include business ethics, corporate governance,
and earnings management. He has publications in refereed journals including Journal of
Business Ethics, Journal of Academy of Business Administration, and Journal of Academy of
Business and Economics.
Guoping Liu is an Associate Professor of accounting at Ryerson University. She earned her
PhD degree from the University of Waterloo. She is a Fellow member of the Chinese Institute of
Certified Public Accountants. Her research papers have been published in journals including
Managerial Auditing Journal, Journal of Accounting and Public Policy, Journal of Business Ethics,
and Journal of International Accounting Research.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints