The desire of prestigious audit committee chairs: what are the benefits for financial reporting quality?

Abstract

Purpose This study aims to examine how the prestige of audit committee (AC) chairpersons influences earnings management. Design/methodology/approach The sample contains 1,973 firm-year observations of French listed firms for the period 2007–2018. The authors examine the status of AC chairs and CEOs by focusing on the French business elite system. This study tests the association between AC chairs’ (relative) status and the level of earnings management using measures of accrual earnings management and real earnings management (REM). Findings The results of this study do not show that high-status AC chairs constrain accruals manipulation. However, the results provide evidence that they play a key role in constraining REM. High-status AC chairs are more likely to enhance the monitoring of this type of manipulation, given their thorough knowledge and understanding of the firm’s business environment and practices. This study also finds evidence that AC chairs with a status higher than CEOs are associated with lower levels of REM. The results suggest that prestigious AC chairs influence lower status CEOs’ strategic decisions. Originality/value This study demonstrates that high-status AC chairs play an important role in detecting and constraining deviations from normal business practices. The results have substantial implications for boards, which will benefit from an understanding of how the appointment of high-status chairs affects financial reporting quality.