Do the Characteristics of Board of Directors Constrain Real Earnings Management in Emerging Markets? – Evidence from the Tunisian Context

This study examines the effects of the characteristics of board of directors (independence, size, frequency of meetings and CEO/Chair duality) on the reduction of the extent of Real Earnings Management (REM) before and after the adoption of the Financial Security Law No. 2005-96 in Tunisia by analyzing the financial data of 29 non-financial companies listed on the Tunis Stock Exchange during the period 2001-2009. The paper tests whether the characteristics of board of directors are significant determinants of REM. It estimates REM proxy using the model of Roychowdhury (2006). The results suggest that a board comprising majority of independent directors reduces the extent of REM. Furthermore, it is observed that there is a significant association between size of the board of directors and discretionary expenses and overproduction, but not sales manipulation. Further, board duality is found to be positively associated with the discretionary expenses in the post-law period, while a negative association is observed between the number of board meetings and sales manipulation and overproduction. Finally, the findings suggest that adoption of the Financial Security Law, 2005 has a negative and significant effect on REM. In addition, the discretionary accruals are positively associated with REM in both pre- and post-law periods