A Study On The Relationship Between Independent Directors Network And Earnings Quality

The financial report reflects the financial status of the company.As the managers’ payment is often linked with the performance of the company,for their interests,managers often manipulates the financial report,which will reduce the earnings quality.It tends to infringe the interests of the minority shareholders.Improving the corporate governance structure and enhancing the regulatory and constraints on management is one of the ways to improve it.In order to improve the corporate governance structure,China promulgated the Guidance on the Establishment of Independent Director System in Listed Companies in 2001,and formally incorporated the independent director system into corporate governance.However,since the establishment of independent directors,its governance role has been controversial by the practical and theoretical circles.With the rise of the social relations theory,scholars began to use the network relationship to study.Therefore,this paper uses the relations between independent directors to construct network,the independent directors’ position reflect their ability.Based on the network,we study the influence of independent directors on the earnings quality of listed companies.At the same time,considering the heterogeneity of information,we add the network constraint coefficient index,the number of structural holes occupied by independent directors will measure their intermediary role in the network.We divide the listed companies into state-owned enterprises and non-state-owned enterprises according to the nature of property rights,then we study whether the heterogeneity of property rights will have an impact on the governance effect of independent directors.Further,taking into account the policy requirements,we try to explore the rationality of the policy,hoping to find whether exist the best number of independent director.After theoretical analysis and empirical test,this paper finds that the position of independent directors has a positive effect on earnings quality.The independent directors in the center of the network,their information superiority,knowledge superiority,reputation effect,supervision and willingness and motivation are significantly stronger than the independent directors at the edge of the network,and thus they can effectively play the role of supervision and management constraints.Through the analysis of 11029 data from 2011 to 2015,we have concluded that:(1)China’s independent directors have a positive relation with listed company’s earnings quality.The higher the independent directors’ position is,the higher the network constraint coefficient of the independent directors is,the more structural holes occupied by the independent directors,the higher the level of earnings quality.(2)In non-state-owned enterprises,the governance role of independent directors is significantly higher than the governance role of independent directors in state-owned enterprises.It can be seen that the heterogeneity of property rights will have an impact on the governance role of independent directors.(3)Through the study of the part number of independent directors and the quality of the earnings,we find that the more the part number of independent directors is,the better the earnings of the company.In the current policy context,we can’t determine whether there is the optimal number of independent directors.This paper studies the relationship between independent directors network and the earnings quality of the company.It has an incremental contribution to the independent directors network literature.The conclusions of this paper can provide inspiration for the selection of candidates for independent directors,the design of the board structure and the measurement of the quality of corporate earnings.At the same time,it provides some valuable research thoughts and practical enlightenment on how to effectively promote the reform of state-owned system and play the effective role of corporate governance mechanism such as independent directors.