An exploratory study of female directors’ constraint on real earnings management

Abstract

This paper aims to examine whether female directors affect firms’ earnings management activities. In recent years, gender diversity has emerged as a prominent topic of discussion in corporate governance. Most prior research into female directors’ relationships with regard to earnings management has primarily focused on accrual-based earnings management (AEM). It has been reported that post-SOX firms switched from accruals-based to real earnings management (REM) methods. Our study uses both earnings management proxies: the absolute value of discretionary accruals in AEM, and various proxies of REM. Empirical results from our Taiwanese sample indicate that firms with female directors have significantly less real earnings management, and the association is particularly driven by lower levels of reduction in discretionary expenditure, which remained unchanged even during the financial crisis of 2008-2010. However, we find a marginal mitigating effect on AEM only when the firm has a greater proportion of female directors. This study not only expands the literature on earnings management practice in emerging markets, but also provides policy implications for board gender diversity.