Association between audit committee characteristics and bank earnings management.
Boo, Elfred Hian Yong.
Date of Issue2006
College of Business (Nanyang Business School)
Mixed results on the effect of corporate governance on earnings management could be attributed to the discrete measure of corporate governance characteristics. Prior studies have measured those characteristics at the board/team level discretely without considering whether an individual governance member possesses a set of attributes necessary to perform the oversight role effectively. This set of attributes at a minimum should include independence, financial expertise and industry expertise. In this study, I hypothesize that audit committees with a higher proportion of members individually possessing all three attributes of independence, financial expertise and banking expertise are more effective monitor against bank earnings management. Results based on a sample of 428 U.S. listed bank holding companies (BHCs) are consistent with my hypothesis after controlling for discrete audit committee characteristics and other corporate governance variables. I also find that BHCs are more likely to have income-increasing loan loss provisions to avoid small earnings declines when none of the audit committee has all three attributes of independence, financial expertise and banking expertise. These results have important implications for researchers and standard-setters in their ongoing efforts to minimize earnings management.
Nanyang Technological University