Does increased board independence reduce earnings management? Evidence from recent regulatory reforms.

In this paper, we examine whether recent regulatory reforms requiring majority board independence is effective in reducing earnings management. Firms that did not have a majority of independent directors prior to the reform (noncompliance firms) are required to increase board independence. We find that overall, compared to the other firms, noncompliance firms do not experience a decrease in earnings management from prior to the reform to afterwards. However, we find that noncompliance firms with high analyst coverage experience a significant reduction in earnings management compared with the other firms. These findings indicate that outside directors' monitoring is more effective in a richer information environment.