– The purpose of this study is to investigate the effectiveness of independent audit committees in constraining real earnings management. This study examines the relationships between audit committee characteristics and real activities manipulation.
– US firms with stronger incentives to undertake real earnings management are selected as a sample. Regressions are run for the empirical analyses.
– It is found that audit committee members' additional directorships are positively associated with real earnings management measured by abnormal cash flows from operations, abnormal discretionary expenses and abnormal production costs, suggesting that audit committees with high additional directorships are less effective in constraining real earnings management. The findings are consistent with the notion that audit committee members' busyness impairs their monitoring effectiveness.
– This study extends the extant research on audit committees' oversight of real earnings management by using refined research design and updated data. This study also provides further evidence on how audit committee members' additional directorships affect their ability to oversee both accrual and real earnings management.
