SYNOPSIS
This study investigates how directors’ service horizon affects real earnings management (REM). By exploiting mergers and acquisitions that terminate directors’ outside appointments on the acquired firms’ boards, we show that independent directors who lose outside board appointments extend their service horizon for remaining directorships and that a decrease in REM follows the extension of director service horizon. The effect of director horizon extension on REM is stronger for directors with more reputation concerns or power to influence financial reporting, for firms with weaker governance mechanisms, and for firms facing lower capital market benefits of meeting or beating earnings expectations. Consistent with enhanced long-term orientation as a result of extended service horizon, we also find a positive impact of director service horizon on firm innovation. Overall, this study sheds light on the important effect of director service horizon on board effectiveness.
JEL Classifications: G30; G34; M40.
