We also find characteristics whose effects are not

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Unformatted text preview: nce on the committee of only independent directors who 26 meet more than twice a year. For the board of directors, we find that board size and competence, as measured by the average experience as board members for the firm and with other firms, are negatively associated with earnings management. We also find characteristics whose effects are not the same on the likelihood of incomeincreasing and income-decreasing discretionary accruals. The proportion of short-term stock options held by non-executive members of the audit committee seems to increase the likelihood of positive earnings management but to decrease the likelihood of negative earnings management, although the latter result is not significant. This result indicates that this type of compensation for directors does not necessarily improve monitoring, but may create incentives that reduce the quality of their control on financial statement reliability. At the board level, we find that non-executive directors’ ownership stake in the firm is negatively associated with negative earnings management whereas its association with positive earnings management, although not significant, is positive. These two results raise serious doubts about the overall effectiveness of using financial motivation to align the interests of these directors with those of the shareholders. While these measures may be appropriate for creating shareholder value, they may reduce the ability of non-executive directors to monitor the reliability of financial statements. While the results of this study seem to support the effectiveness of the reform called for by various groups and enacted by the SEC and many Stocks Exchanges in reducing earnings management, further research is needed to examine how boards of directors and audit committees fulfill their financial reporting monitoring responsibilities. 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