Lead Independent Directors and Real Earnings Management

Abstract

Existing studies suggest that lead independent directors (LIDs) improve corporate governance, audit quality, and some aspects of financial reporting quality. We extend this line of literature by investigating whether there is a relation between firms with an LID and real earnings management (REM). In addition, we investigate this relationship further by looking at the impact of an audit committee, specifically, firms with an LID that either does or does not serve on the audit committee. Using four measures of REM, we find that firms with an LID are associated with less REM. Importantly, we only find consistent evidence of this association for firms with an LID who serve on the audit committee. Our findings, considered in conjunction with the results from prior literature, suggest that LIDs play a role in broadly improving financial reporting quality, especially when they are part of the audit committee.