Earnings management and shareholder activism: The impact of foreign directors

Abstract: Earnings management is widely implemented by managers, which may be the result of weak monitoring. This study is based on 140 companies to capture the effect of shareholder activism (proxied by shareholder proposals) on earnings management. This study adds to the literature by focusing on how the presence of foreign directors on the board moderates this relationship. This study investigatesthe influence of foreign directors by taking the proportion of foreign directors, as well as by measuring the regulation distance of their home countries to the U. S. The result from the empirical analyses implies that shareholder activism can lead to a lower level of earnings management due to improved monitoring. A higher proportion of foreign directors and a closer regulation distance of their home countries to the U. S do not help shareholder activists to reduce earnings management. Decreasing monitoring effectiveness leads to a higher level of earnings management.