Bank affiliated directors and earnings management: Evidence from India

Abstract

We examine the governing impact of creditors, i.e. Bank Appointed Directors (BAD), on the earnings management of corporate firms in a context which is characterized by underdeveloped financial institutions, a weak legal (contract) enforcement system and lack of insolvency resolution framework, i.e. India. Unlike the US, where BADs play a limited monitoring role, BADs in India play an active role in firm monitoring and thus have a negative impact on the discretionary accruals. Further, we document that the impact is greater for firms with a greater degree of information asymmetry and the agency problem. These results remain robust even after controlling for potential endogeneity issue.