This study examines the impact of the ethnic diversity of executives on real earnings management (REM) using 21,217 firm-year observations for 2,209 U.S. public firms between 1993 and 2020. Social identity theory and top management team research suggest executive diversity enhances mutual monitoring and subordinate executives’ independence from the CEO, thus incentivizing subordinate executives to curb CEO’s opportunistic financial reporting. The empirical results indicate a negative relation between executive ethnic diversity and REM. This result holds after controlling for various characteristics of executives and firms, as well as for potential endogeneity using instrumental variable regressions and entropy balancing technique. Cross-sectional tests show that the effect is stronger when each executive has a greater influence on the firm’s operating decisions and when the firm has better internal corporate governance. Collectively, our evidence suggests that executive ethnic diversity strengthens the internal governance of U.S. public firms.
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Research Article|
November 11 2022
The Impact of Executive Ethnic Diversity on Real Earnings Management
Qunfeng Liao
;
Qunfeng Liao
Oakland University
Assistant Professor of Accounting
Accounting and Finance
275 Varner Drive
UNITED STATES
Rochester
Michigan
48309
(248) 370-4289
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Bo Ouyang;
Bo Ouyang
Great Valley School of Graduate Professional StudiesPennsylvania State University
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Yi Tang
Yi Tang
University of Hong Kong
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Received:
February 22 2021
Revision Received:
April 25 2022
Revision Received:
August 09 2022
Revision Received:
November 05 2022
Accepted:
November 10 2022
Online Issn: 1558-7975
Print Issn: 0888-7993
2022
Accounting Horizons (2022)
Citation
Qunfeng Liao, Bo Ouyang, Yi Tang; The Impact of Executive Ethnic Diversity on Real Earnings Management. Accounting Horizons 2022; https://doi.org/10.2308/HORIZONS-2021-026
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