Impact of top management team diversity on earnings management

Abstract

The need to increase diversity among employees gained attention several decades ago. Heterogeneous groups are inclined to make ethical decisions in comparison to homogeneous groups. Organizations manage earnings to show higher profits and lower expenses, and these have negative consequences for stakeholders. Earnings management activities contributed to the bankruptcies and collapse of Enron and WorldCom. Shareholders use financial information as a source for decision making regarding investments. Thus, distortions in financial information may cause shareholders to make unintended decisions. This study investigated the moderating effect of TMT diversity on earnings management. Data were collected from 2008 to 2018 from the Compustat databases for the S&P 500 publicly traded firms to estimate the earnings behavior of firms during the meltdown and post-recession periods. Generalized estimating equations (GEE) statistical method was used to evaluate the results. This study found out that the demographic diversity of executive boards positively impacts the company's performance. The moderation variables Risk diversity (Composite of Age and Tenure), Gender diversity, Knowledge diversity (education) and Value diversity (Composite of Political affiliation and Culture) did not support the study. Gender diversity showed weaken direction in the relationship but was not significant therefore did not support the study whiles Risk diversity, and Knowledge diversity increased the behaviour of earnings management, which was statistically significant and did not support the study, Value diversity showed strength in the relationship but was not significant and did not support the study as predicted.