Abstract
This study investigates whether audit committee independence affects the distribution of earnings levels and changes. We compare the distribution of earnings levels and changes of firms with majority independent audit committees to those of firms with minority independent audit committees. We use the distribution of earnings between the two types of firms to examine whether the high frequency of small earnings increases (and/or profits) relative to small earnings decreases (and/or losses) reported by public firms will be attenuated by the existence of the independent audit committee. We expect that audit committee independence effectively monitors management's discretionary behavior so that firms with majority independent audit committees have smoother earning distributions around zero than firms with minority independent audit committees. Consistent with this expectation, we find that relative to firms with majority independent audit committees, firms with minority independent audit committees (1) report fewer small earnings declines (and/or losses), and (2) report more small earnings increases (and/or profits). These results suggest that the asymmetric pattern of more small earnings increases (and/or profits) than decreases (and/or losses), first documented by Burgstahler and Dichev (1997), can be attributed to earnings management, and the discontinuity of earnings around zero can be attenuated by effective monitoring by an independent audit committee.
Document Type
Article
Publication Date
2011
Publisher Statement
Copyright © 2011 AIBE. This article first appeared in International Journal of Business Research 11, no. 5 (2011): 54-66.
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Recommended Citation
Paik, Daniel, and Daniel Selby. "The Effect of Audit Committee Independence on the Distribution of Earnings Levels and Changes." International Journal of Business Research 11, no. 5 (2011): 54-66.