Independent directors in Sweden and their influence on earnings through accrual and real activities management

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Abstract

The dominating perspective grounded in agency theory predicts that independent boards are more effective in monitoring and thereby reducing earnings management, yet the extant empirical evidence is inconclusive. We nuance the relationship between board independence and earnings management by introducing two additional theories that explain independent directors’ role on the board: the theory of personal dependence and praxis theory. According to personal dependence theory, the influence of independent directors on earnings management is a function of their competitiveness in the labor market, whereas the praxis theory attributes directors’ influence to the influence of the dominant coalition. We focus on two dimensions of earnings management  accrual and real activities management, and account for both direction and magnitude of directors’ influence. Through an empirical test on 148 Swedish corporations from 2017, our findings indicate that the presence of independent directors may not necessarily reduce earnings management. Instead, independent directors may be subject to multiple and sometimes conflicting task demands which differently influence both magnitude and direction of earnings management. Implications for our understanding of the role of independent directors and their influence on corporations are presented.

Keywords: Independent Directors, Earnings Management, Sweden

Authors’ individual contribution: Conceptualization — S.-O.Y.C., F.B., and D.K.; Methodology — S.-O.Y.C., F.B., and D.K.; Formal Analysis — S.-O.Y.C., F.B., and D.K.; Writing — S.-O.Y.C. and Y.P.; Supervision — S.-O.Y.C. and Y.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: The paper is based on Björklund’s and Krieg’s Master dissertation “Accounting Hocus-Pocus” (2019), Linnaeus University, Sweden. An earlier version of the paper was presented at New challenges in corporate governance: Theory and practice (Naples, 2019, October 3–4). Sven-Olof Yrjö Collin acknowledges financial support from the Jan Wallander and Tom Hedelius Foundation and the Tore Browaldh Foundation (P20-0091).

JEL Classification: G340, M410

Received: 05.07.2021
Accepted: 24.02.2022
Published online: 25.02.2022

How to cite this paper: Collin, S.-O. Y., Ponomareva, Y., Björklund, F., & Krieg, D. (2022). Independent directors in Sweden and their influence on earnings through accrual and real activities management. Corporate Ownership & Control, 19(2), 143–158. https://doi.org/10.22495/cocv19i2art12