The Relationships between Board Composition and Earnings Management：
The Corporate Lifecycles’ View
(Research Paper - Draft Edition)

By Anderson Young

In the previous literatures about corporate governance and earnings management, the discussions of the relationships between board composition and earnings management are broad. But the empirical results are mixed. Besides the above, some literatures suggest that both of board composition and earnings management are respectively related to corporate lifecycles. In this case, the purpose of this study is to reinterpret the relationships in the corporate lifecycles’ views.

Our main empirical methodology is the multivariate regression models with OLS. First, according to the corporation lifecycles classification of Anthony and Ramesh (1992), we take dividend payout, sales growth, capital expenditure, and age of the firm as the descriptors to classify firm-years into growth, mature and stagnant stages. As for the independent variables, we take the percentage of independent directors on the board, the dummy variable takes the value of one if the chairman of the board is the CEO and zero otherwise, and the board size as the proxies of board composition. As for the dependent variable, we measure earnings management with the absolute value of discretionary accruals estimated by the modified Jones model (1995)。Moreover, this study also discusses how the industry characteristics have the impacts on the lifecycles’ studies, and presents the concept of industry-comparative lifecycles.

According to the empirical results, this study draws the following conclusions:（1）The concept of industry-comparative lifecycle can decreases the impacts of the industry characteristics on the related studies of corporate lifecycles.（2）In the stage of growth, the chairman of the board is the CEO, the degree of earnings management is higher.（3）In any stage, the board size is negatively related to the degree of earnings management, but not significantly.（4）After compelling the new-listed corporations of Taiwan to install independent directors on boards, in the stage of growth and mature, the percentage of independent directors on the board is significantly and positively related to the degree of earnings management.