Article: Director reputation and earnings management: evidence from the British Honours System Journal: International Journal of Banking, Accounting and Finance (IJBAAF) 2023 Vol.13 No.4 pp.516 - 556 Abstract: This study introduces a novel and methodological enhancement to the literature on the measurement of director reputation and examines the link between director reputation and earnings management. Using hand-collected British Honours System data for 2005-2014, we test two competing hypotheses about the relationship between director reputation and earnings management: the opportunistic hypothesis and the efficient contracting hypothesis. The results support the hypothesis of a positive association between director reputation and abnormal accruals consistent with the opportunistic hypothesis. However, this study also reports evidence suggesting that boards with reputed directors are more likely to report a loss and, thus, less likely to engage in loss avoidance practices, supporting the prediction of the efficient contracting hypothesis. The results are also robust to the inclusion of additional control variables, self-selection bias, and reverse causality that may result from the potential endogeneity of director reputation. The results of this study suggest that director reputation has different implications for different dimensions of earnings management and contributes to the debate on the double-edged implication of director capital alluded to in the literature. Inderscience Publishers - linking academia, business and industry through research

Title: Director reputation and earnings management: evidence from the British Honours System

Authors: Tolulola Lawal

Addresses: School of Finance and Management, SOAS University of London, 10 Thornhaugh Street, Russell Square, WC1H 0XG, London, UK

Abstract: This study introduces a novel and methodological enhancement to the literature on the measurement of director reputation and examines the link between director reputation and earnings management. Using hand-collected British Honours System data for 2005-2014, we test two competing hypotheses about the relationship between director reputation and earnings management: the opportunistic hypothesis and the efficient contracting hypothesis. The results support the hypothesis of a positive association between director reputation and abnormal accruals consistent with the opportunistic hypothesis. However, this study also reports evidence suggesting that boards with reputed directors are more likely to report a loss and, thus, less likely to engage in loss avoidance practices, supporting the prediction of the efficient contracting hypothesis. The results are also robust to the inclusion of additional control variables, self-selection bias, and reverse causality that may result from the potential endogeneity of director reputation. The results of this study suggest that director reputation has different implications for different dimensions of earnings management and contributes to the debate on the double-edged implication of director capital alluded to in the literature.

Keywords: earnings management; earnings quality; British Honours System; director reputation; corporate governance; abnormal accruals; loss avoidance; efficient contracting hypothesis; opportunistic hypothesis.

DOI: 10.1504/IJBAAF.2023.133922

International Journal of Banking, Accounting and Finance, 2023 Vol.13 No.4, pp.516 - 556

Received: 15 Nov 2021
Accepted: 12 Mar 2023
Published online: 05 Oct 2023 *

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Title: Director reputation and earnings management: evidence from the British Honours System

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