Accounting Research Journal

The effect of multiple directorships on real and accrual-based earnings

management: Evidence from Saudi listed firms
Kais Baatour, Hakim Ben Othman, Khaled Hussainey,
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Effect of
The effect of multiple multiple
directorships on real and accrual- directorships

based earnings management

Evidence from Saudi listed firms 395
Kais Baatour Received 5 June 2015
Revised 11 December 2015
University Manouba, ISCAE, LIGUE LR99ES24, Campus Universitaire Manouba, Accepted 10 February 2016
2010, Tunisia and Department of Accounting and Finance,
Tunis Business School, University of Tunis, Tunisia
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Hakim Ben Othman

Institut Supérieur de Comptabilité et d’Administration des Entreprises (ISCAE),
University of Manouba, Manouba, Tunisia and Department of Accounting and Finance,
Tunis Business School, University of Tunis, Tunisia, and
Khaled Hussainey
Department of Accounting and Financial Management,
University of Portsmouth, Portsmouth, UK

Abstract
Purpose – The study aims to examine the effect of multiple directorships on accrual-based earnings
management and real earnings management. It analyses whether earnings management practices in the
Saudi context increase or decrease with the average number of multiple directorships.
Design/methodology/approach – The study uses the approach by Roychowdhury (2006) to capture the
level of real earnings management and uses the cross-sectional model by Jones (1991) to measure accrual-
based earnings management.
Findings – The paper provides partial evidence supporting the “busyness” hypothesis where earnings
management practices increase with the number of multiple directorships. The evidence shows that multiple
directorships have a positive and significant effect on real earnings management in the Kingdom of Saudi
Arabia. However, we find no significant impact of multiple directorships on accrual-based earnings management.
Originality/value – This is the first study that empirically investigates the relationship between multiple
directorships and earnings management in the Kingdom of Saudi Arabia. The paper contributes to the limited
literature on multiple directorships in developing countries by examining their impact on opportunistic real
earnings management.
Keywords Saudi Arabia, Accrual-based earnings management, Real earnings management,
Busyness hypothesis, Multiple directorships, Reputation hypothesis
Paper type Research paper

1. Introduction
There is an extensive academic research that examines the importance of corporate
governance in constraining accrual-based earnings management in the USA and other Accounting Research Journal
Vol. 30 No. 4, 2017
pp. 395-412
The authors would like to thank the editor and an anonymous reviewer for his/her helpful comments © Emerald Publishing Limited
1030-9616
on an earlier version of this paper. DOI 10.1108/ARJ-06-2015-0081
 ARJ developed countries (Alves, 2014; Bédard et al., 2004; Bekiris and Doukakis, 2011; Davidson
30,4 et al., 2005; Garven, 2009; Osma and Noguer, 2007; Park and Shin, 2004; Peasnell et al., 2005;
Xie et al., 2003; Yang and Krishnan, 2005), as well as in developing countries (Ab Razak and
Palahuddin, 2014; Banderlipe, 2009; Hasan et al., 2014; Mansor et al., 2013; Mohamad et al.,
2012; Sáenz González and García-Meca, 2014; Saleh et al., 2005; Siregar and Utama, 2008;
Uwuigbe et al., 2014; Waweru and Riro, 2013). These studies, however, do not consider the
396 role of multiple directorships; that is, they ignore the fact that directors can sit on more than
one board in multiple firms.
In addition, limited studies (Banderlipe, 2009; Mansor et al., 2013; Saleh et al., 2005)
consider the impact of multiple directorships on accrual-based earnings management; but
these studies do not consider the possibility that managers engage in real earnings
management. Goh et al. (2013, p. 28) argue that “real earnings management is a more serious
issue than accruals-based earnings management because the former affects a firm’s
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fundamental performance”. Moreover, Ewert and Wagenhofer (2005, p. 1115) criticize studies
that ignore real earnings management and argue that these studies “may overestimate the
impact of various institutional safeguards to control earnings management”. This study
attempts to fill the gap in the corporate governance and earnings management literature by
empirically examining the impact of multiple directorships on earnings management and,
more precisely, on both real and accrual-based earnings management activities.
There are two theoretical hypotheses relating multiple directorships to earnings
management. The busyness hypothesis posits that directors holding multiple directorships
will have insufficient time to monitor the firm’s managers (Core et al., 1999; Fich and
Shivdasani, 2006; Morck et al., 1988). From this point of view, earnings management should
be positively associated with the average number of additional directorships held by board
members. On the other hand, the reputational hypothesis argues that the number of
additional directorships is an indicator of the directors’ reputation and expertise in dealing
with financial reporting issues (Bédard et al., 2004; Shivdasani, 1993; Yang and Krishnan,
2005). From this point of view, it is expected that earnings management will decrease when
the average number of additional directorships held by the directors of the firm is higher.
The net effect of multiple directorships on real earnings management and accrual-based
earnings management is, therefore, an empirical issue.
One of the most important methodological issues involved in the study of multiple
directorships is to measure this variable with a sufficient degree of accuracy. Prior research
uses dummy variables to capture multiple directorships. For example, Banderlipe (2009)
measures multiple directorships as a dummy variable equal to one if the firm has at least
one independent director who holds three or more outside directorial positions and zero if
otherwise. Mansor et al. (2013) use a dummy variable that takes the value of 1 for companies
that do not have multiple directorships and zero otherwise. Moreover, Saleh et al. (2005,
p. 90) measure multiple directorships as the ratio of members on the board with multiple
directorships (more than two directorships) to total members and they argue that:
We do not use a more precise measure such as the average number of directorship held by the
members because the information may not be appropriately disclosed. Thus, we have doubt about
the completeness of the data.
We are motivated to examine the association between multiple directorships and the
practice of earnings management in Saudi-listed firms by two important reasons.
First, a survey of the existing literature on real earnings management reveals that, with
the exception of few studies (Tabassum et al., 2014; Zamri et al., 2013; Zgarni et al., 2012;
Zgarni et al., 2014), the existing research is predominantly US based. In Saudi Arabia, there
 is limited research on this area. While there is research on accrual-based earnings management Effect of
(Al-Abbas, 2009; Al-Moghaiwli, 2010), there is no research on real earnings management in multiple
Saudi Arabia. The Saudi institutional setting provides a unique context for this research issue.
The corporate governance code was issued by the Board of Capital Market Authority (2006)
directorships
and amended in 2010 to regulate and develop the Saudi capital market and increase the
credibility and transparency of financial reporting (Al-Matari et al., 2012). Graham et al. (2005)
and Cohen et al. (2008) document that US firms switch from accrual-based earnings
management to real earnings management after the enactment of the Sarbanes-Oxley Act,
397
suggesting that firms are more likely to engage in real earnings management when corporate
governance is strengthened and less flexible financial reporting standards are applied. Our
study is carried out after the code of corporate governance became a compulsory regulation in
2010. This environment provides incentives for the management to engage in real earnings
management. Accordingly, we ask the following question: does the effect of corporate
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governance mechanisms on earnings management practices, documented in previous Saudi

studies, persist when considering real earnings management as the dependent variable?
Second, by focusing on the Kingdom of Saudi Arabia, we study a developing country
paying a particular attention to the issue of multiple directorships. The corporate governance
code (article 12, h) states that for a member of the Board of Directors, the maximum number of
directorships is five in five joint-stock companies. However, the maximum number of
directorships that a director can hold in the boards of non-joint-stock companies is not
mentioned anywhere in the Saudi laws. A study conducted in the Saudi context seems to be
crucial, to study the ability of directors with multiple board appointments to constrain
managers’ opportunistic behavior effectively and to monitor earnings management activities.
In our empirical tests, we use three real earnings management measures, as developed in
prior research (Roychowdhury, 2006; Cohen et al., 2008; Cohen and Zarowin, 2010; Zamri
et al., 2013; Achleitner et al., 2014; Sun et al., 2014):
(1) abnormal cash flows from operations;
(2) abnormal discretionary expenses; and
(3) abnormal production costs.

In addition, following Braam et al. (2015), we construct three aggregated measures of real
earnings management by combining the three aforementioned individual measures. We use the
cross-sectional Jones (1991) model which has been used in other studies, such as Baxter and
Cotter (2009) and Roychowdhury (2006), to capture accrual-based earnings management.
The rest of the paper is organized as follows. Section 2 provides a brief overview of the
Saudi code of corporate governance. Section 3 reviews the relevant literature and presents
our predictions. Section 4 presents the sample selection and the empirical models. Section 5
presents the empirical results. Section 6 concludes.

2. Corporate governance in Saudi Arabia

The Kingdom of Saudi Arabia issued its own code on corporate governance in 2006, which
was amended in 2010. The corporate governance code aims to ensure the protection of
shareholders’ and stakeholders’ rights.
Saudi Arabian companies have a unitary board system in which board members are
appointed by the general assembly. The board of directors includes executive, non-executive
and independent members. According to the code of corporate governance (article 12), the
chairperson of the board of directors is not allowed to occupy any other executive position in
the company. This means that CEO duality does not exist in Saudi Arabia. The number of
 ARJ board members should not be less than three (3) and more than eleven (11) as stated in
30,4 article 12 of the Code (2006, p. 13):
The Articles of Association of the company shall specify the number of the Board of Directors
members, provided that such number shall not be less than three and not more than eleven.
Regarding the independence of the board of directors, the Saudi Code of Corporate
398 Governance establishes that the number of independent board members shall not be less
than two members, or one-third of the members, whichever is greater. The number of non-
executive directors must represent the majority of the members of the board of directors.
Articles 14 and 15 of the code provide detailed rules for the formation of nomination and
remuneration committees and audit committees. The establishment of these committees is
mandatory for all listed companies. It is worth mentioning that there is no legal requirement
for the implementation of executives committees.
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3. Literature review
3.1 Earnings management
The accounting literature distinguishes between two types of earnings management. The
first type, accounting earnings management, refers to “the interpretation of accounting
standards and their application to transactions and events that have already occurred” as
defined by Ewert and Wagenhofer (2005, p. 1104). Examples of accounting earnings
management include the selection of accounting methods such as the depreciation or pricing
of inventory. The second type, real earnings management, is defined:
[. . .] as departures from normal operational practices, motivated by managers’ desire to mislead
at least some stakeholders into believing that certain financial reporting goals have been met in
the normal course of operations (Roychowdhury, 2006, p. 337).
Similar to Roychowdhury (2006), Zang (2012, p. 676) states that real earnings management is:
[. . .] a purposeful action to alter reported earnings in a particular direction, which is achieved by
changing the timing or structuring of an operation, investment, or financing transaction and
which has suboptimal business consequences.
Under these definitions, real earnings management is used opportunistically by firms’ managers
for their own private benefits rather than for the benefits of the company’s stockholders.
Prior literature documents that each type of earnings management has its associated
benefits and costs. The cost of real earnings management is that it has a significant negative
impact on a firm’s future performance. Tabassum et al. (2014) investigate the impact of real
earnings management on future financial performance. Based on a sample of manufacturing
firms in Pakistan over the period of 2004 to 2011, they document evidence that firms
engaged in real earnings management through abnormal production costs face lower
financial performance in subsequent years. The benefit is that real earnings management is
hard to detect (Manowan and Lin, 2013). For accounting earnings management, the benefit
is that it has no direct effect on cash flows. The cost is that this type of earnings
management is more likely to draw auditor and regulatory scrutiny (Cohen and Zarowin,
2010; Roychowdhury, 2006). Manowan and Lin (2013, p. 89) state that real earnings
management is more difficult to be detected by auditors compared to accrual-based earnings
management because the former manifests from managers’ real economic actions, whereas
the latter can be detected by examining a firm’s accounting policies. Chi et al. (2011) examine
whether firms resort to real earnings management when their ability to manage accruals is
constrained by higher quality auditors. The empirical results show that city-level auditor
 industry expertise, audit fees and Big N auditors are associated with higher levels of real Effect of
earnings management. multiple
directorships
3.2 Earnings management in Saudi Arabia
Saudi studies on earnings management focus on one earnings management technique in
isolation and provide mixed evidence on the impact of corporate governance on accrual-
based earnings management. For example, Al-Moghaiwli (2010) provides evidence of the
practice of deliberate earnings management on the part of managers in Saudi Arabia. The
399
empirical analysis is carried out using a sample of 46 companies listed on the Saudi Stock
Market over the period from 2005 to 2007, using multivariate statistical analysis. He finds
that managers of large Saudi-listed companies which have high ratio of foreign employees to
total employees tend to manage earnings through discretionary accruals to avoid potential
political costs. Al-Abbas (2009) examines the association between corporate governance
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mechanisms and earnings management in the Saudi business environment, using a sample
of joint-stock companies for the period from 2005 to 2007. He measures earnings
management by using current abnormal accruals. His results provide no evidence that
corporate governance mechanisms mitigate earnings management. Alghamdi (2012)
investigates to what extent corporate governance and external audit can affect earnings
management practices. The expectation of beneficial corporate governance practices and
external audit constraining opportunistic earnings management activities is, to a large
extent, found to be inaccurate. No internal corporate governance variables, apart from
outside director, board size and board meetings, examined in the study by Alghamdi (2012)
are shown to have any significant effect on earnings management. A recent study by
Habbash (2013) finds that some corporate governance attributes, namely, board size and
independence, are negatively and significantly associated with earnings management
measured by the absolute value of discretionary accruals. His study covers a period from
2006 to 2009. It is important to note that none of these studies attempts to distinguish
between real earnings management and accrual-based earnings management. This is not
surprising, as real earnings management is hard to distinguish from normal business
activities. According to Ewert and Wagenhofer (2005, p. 1115):
[. . .] ignoring real earnings management may have an effect on the estimation of (accounting)
earnings management, because most discretionary accruals models use variables whose values
may be affected by real earnings management.
Our study is different from the aforementioned ones in various respects; first, these studies
provide evidence of a relationship between corporate governance characteristics and
accrual-based earnings management. However, whether this relationship extends to a more
costly earnings management technique (i.e. real earnings management) remains a critical
question that this paper seeks to address. Second, this study is more concerned with the
effect of multiple directorships on real and accrual earnings management rather than
the relationship between board characteristics and discretionary accruals. Finally, unlike
Alghamdi (2012) and Habbash (2013), who examine a sample prior to 2010, we focus on the
period following the amendment of the corporate governance regulations.

3.3 Multiple directorships and earnings management: Busyness versus reputational

hypotheses
Fama (1980) argues that the market for managerial labor provides incentives for directors to
be good monitors of the firm’s management. The reward is the offer of additional directorial
positions on other firms’ board. Therefore, Fama and Jensen (1983) and Vafeas (1999) use the
 ARJ number of directorships per board member as a proxy of the reputation of a director in
30,4 monitoring managers. Saleh et al. (2005) find in their empirical study that multiple
directorships factor is negatively related to earnings management only in firms with
negative unmanaged earnings. Yang and Krishnan (2005) find that the number of outside
directorships held by audit committee directors is negatively associated with earnings
management behavior. The findings of Banderlipe (2009) in the Philippines context are also
400 supportive of a negative association between multiple directorial positions and earnings
management.
However, other research does not support the negative relationship between the number
of external appointments held by corporate directors and earnings management suggested
above. Several studies, e.g. Morck et al. (1988), note a decreasing monitoring effectiveness of
board members when they are busy with high additional directorships. In line with this
argument, the Saudi code of corporate governance (2006) states that for a member of the
board of directors of one firm, the maximum number of directorial positions is five in joint-
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stock companies. Mansor et al. (2013) suggest that non-multiple directorships serve as an
important corporate governance mechanism that could assist in overcoming the problem of
earnings management. Sarkar et al. (2008) find that boards that have directors with multiple
appointments exhibit higher earnings management. Garven (2009) and Sun et al. (2014)
show that audit committees with high additional directorships are less effective in
constraining real earnings management.
In addition, the empirical findings regarding the effect of multiple directorships on
earnings management are mixed. The overall impact of multiple directorships on earnings
management becomes an empirical issue.

4. Research methodology
4.1 Sample selection and data collection procedures
The sample used in this study covers four years from 2010 to 2013. The choice of this period
is based on the fact that the Saudi corporate governance code has been amended in 2010.
Detailed information on corporate governance and firm characteristics variables are
collected by hand from annual report and corporate governance report. These reports are
available on the Saudi Arabia stock exchange (Tadawul) website www.tadawul.com.sa
We exclude the following sectors from our analysis:

banks and financial services; and

insurance because the finance industry is a highly regulated industry and the
behavior of earnings in the finance sector is different from other sectors (Mohamad
et al., 2012).

Consistent with Cohen and Zarowin (2010), we require at least eight observations for each
industry-year group. At the time of sampling, 121 non-financial companies are listed on
Saudi Arabia stock exchange, but after imposing all data requirements, the final sample
consists of 95 individual firms over the period of 2010 to 2013, including 7 industries
(Appendix).

4.2 Definition and measurement of dependent and independent variables

4.2.1 Dependent variables.
4.2.1.1 Measures of real earnings management. Following prior studies (Roychowdhury,
2006; Cohen and Zarowin, 2010; Zgarni et al., 2012; Manowan and Lin, 2013; Zamri et al.,
2013; Sun et al., 2014; Braam et al., 2015), the current study uses three metrics to study the
 level of real earnings management, namely, the abnormal levels of cash flow from Effect of
operations (RM_CFO), production costs (RM_PROD) and discretionary expenses multiple
(RM_DISX).
Consistent with Roychowdhury (2006), the study estimates the abnormal level of each
directorships
method of real earnings management as the residual from the corresponding estimation
model. Manowan and Lin (2013, p. 88) define sales manipulation as managers’ attempts to
temporarily increase sales during the year through increased price discounts or more lenient
401
credit terms. These lead to lower cash inflow over the life of the sales as long as suppliers of
the firm do not offer matching discounts or lenient credit terms on firm inputs. We run the
following cross-sectional regression for every industry and year to estimate the normal level
of cash flow from operations:
     
CFOit =Ait1 ¼ b 1 1=Ait1 þ b 2 Salesit =Ait1 þ b 3 DSalesit =Ait1 þ « it
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where:

CFOit, = cash flow from operation of firm i in period t;

Ait1, = total assets of firm i in year t1;
Salesit, = sales of firm i in year t;
DSalesit, = sales of firm i in year t less sales of firm i in year t-1; and
« it, = a residual term that captures the level of abnormal cash flow (RM_CFO) of firm i in year t.

For the sake of convenience and uniformity, RM_CFO is multiplied by negative one (so that
the higher the value of this variable, the higher will be the value of real earnings
management through sales manipulation) and called this variable RM_CFO (R).
The second type of real earnings management is the reduction of discretionary
expenditures. Reduction of discretionary expenditures means that managers reduce
discretionary expenditures such as advertising expenses, R&D expenses, and selling,
general and administrative expenses to increase earnings (Sun et al., 2014, p. 160). We use
Roychowdhury’s (2006) model to estimate the normal of discretionary expenses:
   
DISEXPit =Ait1 ¼ b 1 1=Ait1 þ b 2 Salesit1 =Ait1 þ « it

where:

DISEXPit, = the sum of Selling and Marketing Expenses and General and Administrative Expenses
of firm i in year t;
Ait1, = total assets of firm i in year t1;
Salesit1, = sales of firm i in year t1; and
« it, = a residual term that captures the level of abnormal discretionary expenses (RM_DISX)
of firm i in year t.

For the sake of convenience and uniformity, RM_DISX is multiplied by negative one (so that
the higher the value of this variable, the higher will be the value of real earnings
management through reduction of discretionary expenses) and called this variable
RM_DISX (R).
Another type of real earnings management is to produce more units of goods than
necessary to meet expected demand. We run the following model cross-sectional regression
for every industry and year to compute abnormal production costs:
      
ARJ PRODit =Ait1 ¼ b 1 1=Ait1 þ b 2 Salesit =Ait1 þ b 3 DSalesit =Ait1
30,4  
þ b 4 DSalesit1 =Ait1 þ « it

where:

PRODit, = the sum of cost of goods sold and change in inventory of firm i in year t;
402 Salesit, = sales of firm i in year t;
DSalesit, = sales of firm i in year t less sales of firm i in year t1;
DSalesit-1, = sales of firm i in year t1 less sales of firm i in year t2;
Ait1, = total assets of firm i in year t1; and
« it, = a residual term that captures the level of abnormal production costs (RM_PROD) of firm
i in year t.
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We use three aggregate measures of real earnings management in this study. First,
consistent with Cohen and Zarowin (2010) and Braam et al. (2015), we define an aggregate
measure of real earnings management, RM_CD, which is computed as the sum of the
standardized variables of RM_CFO and RM_DISX multiplied by negative one. Second,
consistent with Cohen and Zarowin (2010), Zang (2012) and Braam et al. (2015), we define an
aggregate measure of real earnings management, RM_PD, which is computed as the sum of
the standardized variable of RM_PROD and the standardized variable of RM_DISX
multiplied by negative one. Third, consistent with Cohen et al. (2008) and Braam et al. (2015),
we define an aggregate measure of real earnings management, RM_CPD, which is computed
as the sum of the standardized variable of RM_PROD and the standardized variables of
RM_CFO and RM_DISX multiplied by negative one. The higher the value of each of the
three aggregate measures, the more likely the firm is engaged in real earnings management.
4.2.1.2 Measurement of accrual-based earnings management. To measure accrual-based
earnings management, the following cross-sectional model was proposed by Jones (1991) and
then used by Roychowdhury (2006), Zang (2012), Saleh et al. (2007) and Bédard et al. (2004):



TACCit =Ait1 ¼ a0 þ a1 1=Ait1 þ b 1 ð DSit =At1 Þ þ b 2 PPEit =Ait1 þ « it

where:

TACCit, = is total accruals of firm i in year t. Total accruals are computed as net income minus oper-
ating cash flows;
DSit, = change in net sales for firm i between year t1 and t;
PPEit, = gross property, plant, and equipment for firm i in year t; and
« it, = a residual term that captures the level of accrual-based earnings management of firm i in year t.

By estimating this model for each industry for each industry-year grouping, residuals
(RES_ACC) are taken as level of accrual-based earnings management.
4.2.2 Independent variables and control variables. Following Ferris et al. (2003), our
independent variable is the number of directorships per director (NDIR), calculated as the
total number of other directorships divided by the total number of directors on the board.
In our multiple regression analysis, we control for a large set of other corporate
governance and firm characteristics’ variables that, as suggested by prior literature,
potentially affect earnings management. These control variables include board
independence (Osma, 2008; Alves, 2014), the number of board meetings (Xie et al., 2003),
 board size (Uwuigbe et al., 2014; Kang and Kim, 2012), audit committee size and the number Effect of
of audit committee meetings (Lin and Hwang, 2010). We include another control variable in multiple
the regression model that relates to the existence of an executive committee. We are aware
directorships
that there is only one study by Xie et al. (2003) that examined the role of executive
committees in constraining earnings management. They argue that the executive committee
plays an indirect role in controlling earnings management, as it can dictate what is seen by
the whole board of directors. 403
Their study reveals that the composition of the executive committee is associated with
the level of earnings management and thereby may allow a committee to better perform
oversight functions.
In Saudi Arabian firms, the executive committee generally provides recommendations to
the board of directors with regard to different subjects, such as strategic and business plans.
Moreover, the board may delegate certain of its authorities and responsibilities to the
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executive committee. The existence of an executive committee should help the board of
directors to monitor management’s behavior.
We also control for the following variables identified in the existing earnings
management literature (Zamri et al., 2013; Ye, 2014): return on assets, firm size and leverage.

4.3 Regression model

We test the association between the dependent variables of earnings management and the
independent variables of corporate governance characteristics by estimating the following
seven regression model:

EMit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit

þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

where:

a0, = intercept; and

a1 – a10, = coefficients of slope parameters;

4.3.1 Dependent variables. EM: RM_CFO (R), RM_DISX (R), RM_PROD, RES_ACC,
RM_CD, RM_PD, RM_CPD (all the variables are as previously defined and this model is
separately tested);
4.3.2 Independent variables. NDIR: The total number of other directorships divided by
the total number of directors on the board;
4.3.3 Control variables. BSIZE: the number of directors in the board;
NUMBBMEET: the number of board meetings held annually by the board of directors;
ACSIZE: Number of audit committee members;
NUMACMEET: The number of audit committee meetings;
IND: the ratio between the number of independent directors and the total number of
board members;
EXECCOM: a dummy variable that takes the value of 1 if an executive committee exists;
and zero otherwise;
SIZE: the natural logarithm of total assets at year-end;
ROA: net income divided by lagged total assets; and
LEV: total long-term debt divided by total assets.
 ARJ 5. Empirical results
30,4 5.1 Descriptive analysis and correlations
Table I shows the descriptive statistics for the variables used in this paper. Table I
shows that each director held an average of one board seat on other listed companies.
The maximum number of directorships on other boards is four seats. These results
show that the Saudi firms met the requirement made by the corporate governance code
404 on the maximum number of multiple directorships, which are five directorships on
joint-stock companies. The number of directors on the board is made of an average of
eight directors. Independent non-executive directors account for more than a third (48
per cent) of the total number of directors. Also, having an approximate mean value of
about 57 per cent for EXECCOM basically reveals that the majority of the Saudi firms
has an executive committee.
An examination of the correlation matrix, shown in Table II indicates that all
correlation coefficients are less than 0.80, suggesting that multicollinearity does not
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constitute a major concern (Gujarati, 2003). Table II shows that there are some
significant correlations among independent and control variables. The highest
correlation is between SIZE and LEV, of 0.621 (p < 0.01), suggesting that larger firms
have higher debt levels. The correlation between SIZE and NDIR is also significant
(with correlation coefficient 0.225), suggesting that larger firms have more directors
with high number of multiple directorships.

Variable Mean SD Minimum Maximum

NDIR 1.329 0.898 0 4.545

IND 0.487 0.175 0 1
BSIZE 8.157 1.465 4 11
NUMBBMEET 5.284 2.290 0 19
ACSIZE 3.303 0.531 3 5
NUMBACMEET 5.206 2.267 1 21
Table I. EXECCOM 0.576 0.495 0 1
Descriptive statistics SIZE 7.596 1.515 3.682 12.733
for independent and ROA 0.087 0.104 0.421 0.490
control variables LEV 0.122 0.156 0 0.669

Variable NDIR IND BSIZE NUMBBMEET ACSIZE NUMACMEET SIZE ROA LEV

NDIR 1
IND 0.136 1
BSIZE 0.190* 0.199* 1
NUMBBMEET 0.108 0.049 0.082 1
ACSIZE 0.002 0.074 0.368* 0.070 1
NUMACMEET 0.026 0.017 0.054 0.243* 0.067 1
SIZE 0.225* 0.310* 0.462* 0.016 0.395* 0.010 1
Table II. ROA 0.088 0.195* 0.149 0.103 0.035 0.084 0.025 1
Correlation matrix LEV 0.111 0.146 0.179* 0.129 0.204* 0.058 0.621* 0.262* 1
among independent
and control variables Note: *Significance at the 1% level
 5.2 Estimation models Effect of
Table III reports the regression coefficients for the regression models used to estimate multiple
normal levels of cash flow from operations, discretionary expenses and production costs.
The table reports the mean coefficients across industry-years and t-statistics from standard
directorships
errors across industry-years. The explanatory power of the models is quite high. The
average adjusted R2 across industry-year is 89 per cent for production costs and 50 per cent
for cash flows from operations. The mean adjusted R2 across industry-years is 33 per cent 405
for the model to predict normal level of accruals.

5.3 Main regression results

Table IV displays the results of the regression equation models which were run using four
OLS regression models which were applied using three individual proxies of real earnings
management (RM_CFO (R), RM_DISX (R), and RM_PROD), and abnormal discretionary
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accruals, which is the measure of accrual-based earnings management, as dependent

variables.
We find a significant positive coefficient of 0.031 (t = 3.29) on NDIR in the RM_CFO (R)
regression, suggesting that multiple directorships are associated with more real earnings
management through sales manipulation. Consistent with the RM_CFO (R) results, we find
a positive coefficient of 0.024 (t = 2.57) on NDIR in the RM_PROD regression. This result
implies that there is a significant positive relationship between multiple directorships and
real earnings management through overproduction for the sampled firms in Saudi Arabia.
That is, the higher the number of directorial positions a board member has, the greater the
level of real earnings management.
Although the coefficients on NDIR in the RM_ DISX (R) and RES_ACC are insignificant
at conventional significance levels, their signs are consistent with the busyness hypothesis’s
predictions.

Variable CFOt/At1 DISEXPt/At1 PROD t/At1 TACC

1/A t1 27.387 (2.04)* 1.698 (0.57) 3.263 (0.25) 11.193 (1.00)
S t/At1 0.257 (3.85)*** 0.766 (11.51)***
DSt/At1 0.020 (0.20) 0.356 (2.81)** 0.065 (0.71)
S t1/At1 0.048 (4.13)***
DSt1/At1 0.199 (2.09)*
PPE t/At1 0.025 (0.79)
_cons 0.025 (0.69) 0.033 (6.96)*** 0.049 (1.85)* 0.005 (0.16)
R2 0.50 0.27 0.89 0.33
N 284 284 189 284

Notes: *Significance at the 10% level; **significance at the 5% level; ***significance at the 1% level;
This table reports the estimated parameters in the following regressions:
     
CFOit =Ait–1 ¼ b 1 1=Ait–1 þ b 2 Salesit =Ait–1 þ b 3 DSalesit =Ait–1 þ « it
   
DISEXPit =Ait–1 ¼ b 1 1=Ait–1 þ b 2 Salesit–1 =Ait–1 þ « it
       
PRODit =Ait1 ¼ b 1 1=Ait1 þ b 2 Salesit =Ait1 þ b 3 DSalesit =Ait1 þ b 4 DSalesit1 =Ait1 þ « it
Table III.



Model parameters
TACCit = Ait–1 ¼ a0 þ a1 1=Ait–1 þ b 1 DSit =At–1 þ b 2 PPEit =Ait–1 þ « it
 ARJ Variable RM_CFO (R) RM_DISX (R) RM_PROD RES_ACC
30,4
NDIR 0.031 (3.29)*** 0.005 (1.31) 0.024 (2.57)** 0.007 (0.71)
IND 0.048 (0.95) 0.018 (0.92) 0.057 (1.14) 0.047 (0.93)
BSIZE 0.009 (1.34) 0.003 (1.26) 0.000 (0.00) 0.002 (0.24)
NUMBBMEET 0.006 (1.49) 0.001 (0.51) 0.007 (1.80)* 0.005 (1.25)
ACSIZE 0.013 (0.75) 0.001 (0.20) 0.002 (0.10) 0.020 (1.19)
406 NUMACMEET 0.004 (1.00) 0.001 (1.03) 0.007 (1.71)* 0.003 (0.67)
EXECCOM 0.013 (0.78) 0.002 (0.31) 0.004 (0.24) 0.027 (1.59)
SIZE 0.006 (0.72) 0.000 (0.01) 0.004 (0.44) 0.000 (0.03)
ROA 0.453 (4.87)*** 0.085 (2.38)** 0.175 (1.87)* 0. 007 (0.08)
LEV 0.006 (0.08) 0.030 (1.04) 0.055 (0.75) 0.026 (0.35)
_cons 0.036 (0.47) 0.006 (0.22) 0.025 (0.33) 0.065 (0.86)
R2 0.15 0.04 0.09 0.03
N 253 253 177 253
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Notes: *Significance at the 10% level; **significance at the 5% level; ***significance at the 1% level;
This table reports the estimated parameters in the following regressions:
RM CFO ðRÞit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit

þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

RM DISXðRÞit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit

Table IV. þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

Regression results
(using accrual-based RM PRODit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit
earnings
management and þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it
individual measures
of real earnings
RES ACCit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit
management as
dependent variables)
þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

Table V presents the estimation results using three different aggregate measures of real
earnings management as dependent variables. Recall that a higher value of each of these
aggregate measures implies more real earnings management. As the results for the three
models are quite analogous, we discuss them simultaneously. In the three models, the
coefficient on the number of directorships per director is positive and significant at least at
the 10 per cent level.
Collectively, these results suggest that when directors are busy with multiple
directorships, they are less likely to monitor managers and to limit their earnings
management behavior. These results are consistent with the findings of Mansor et al. (2013),
Sarkar et al. (2008), and Garven (2009) who opine that busy directors are less effective
monitors and therefore provide managers with incentives to engage in earnings
management. This outcome, however, contradicts Saleh et al. (2005), Yang and Krishnan
(2005), and Banderlipe (2009) who argue that directors with multiple board seats tend to be
effective monitors of management, and therefore will limit earnings management practices.
Regarding the control variables, the coefficient on audit committee meetings is
significantly negative in three specifications (Table IV, column 3 and Table V, columns 2
 Variable RM_CD RM_PD RM_CPD
Effect of
multiple
NDIR 0.337 (3.27)*** 0.247 (1.78)* 0.338 (2.20)** directorships
IND 0.004 (0.01) 0.895 (1.18) 0.779 (0.93)
BSIZE 0.002 (0.03) 0.057 (0.58) 0.016 (0.15)
NUMBBMEET 0.060 (1.42) 0.112 (1.90)* 0.133 (2.04)**
ACSIZE 0.126 (0.68) 0.086 (0.35) 0.124 (0.45)
NUMACMEET 0.060 (1.45) 0.123 (1.95)* 0.141 (2.03)** 407
EXECCOM 0.061 (0.33) 0.025 (0.10) 0.109 (0.40)
SIZE 0.047 (0.50) 0.021 (0.16) 0.083 (0.58)
ROA 1.759 (1.70)* 0.454 (0.32) 2.052 (1.32)
LEV 0.664 (0.81) 1.286 (1.15) 1.713 (1.39)
_cons 0.413 (0.49) 0.022 (0.02) 0.164 (0.13)
R2 0.07 0.06 0.09
N 253 177 177
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Notes: *Significance at the 10% level; **significance at the 5% level; ***significance at the 1% level;
This table reports the estimated parameters in the following regressions:
RM CDit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit

þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

RM PDit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit

Table V.
Regression results
þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it
(using aggregate
measures of real
earnings
RM CPDit ¼ a0 þ a1 NDIRit þ a2 INDit þ a3 BSIZEit þ a4 NUMBBMEETit þ a5 ACSIZEit
management as
dependent variables)
þ a6 NUMACMEETit þ a7 EXECCOMit þ a8 SIZEit þ a9 ROAit þ a10 LEVit þ « it

and 3). This suggests that audit committees that meet frequently are associated with more
effective monitoring of management and are more likely to limit earnings management. This
is consistent with the findings of Xie et al. (2003). The results in Tables IV and V suggest
that in most cases we find support for a negative and significant relationship between
earnings management and return on assets. Thus, more profitable firms are less engaged in
earnings management, which confirms the results of Bédard et al. (2004) and Habbash
(2013). Finally, no relationship is found between the voluntary establishment of an executive
committee and earnings management proxies.

6. Conclusion
The objective of our study is to examine the impact of multiple directorships held by board
members on earnings management measured by discretionary accruals and real earnings
management. We find that real earnings management is more likely to occur in companies
whose boards include more directors with multiple board appointments. Our findings
largely support calls for limits on the number of directorships held by board members. Our
study suggests that the number of external appointments held by corporate directors is an
important variable that has been largely overlooked by prior corporate governance and
earnings management literature.
Our findings are of value to Saudi Arabia regulatory agencies such as the Capital Market
Authority (CMA) who seek to improve board effectiveness in listed companies. The CMA
 ARJ should consider revising the maximum number of additional directorships to protect
30,4 shareholders’ interests from opportunistic earnings management behavior. The findings of
this study also imply that shareholders should consider the number of multiple
directorships of board members before they appoint them.
Like other studies, this study has some limitations. First, we focus on real earnings
management through operational decisions. Future research, however, could consider other
408 less common methods of real earnings management, such as the sale of fixed assets. Second,
the sample period covers only four (4) years of data from the Saudi stock exchange market.
Future research could examine other corporate governance characteristics which may
impact real earnings management. Further research could concentrate on the effect of
independent directors’ cash compensation on real earnings management. Future research
can use other proxies for multiple directorships such as the number of outside directorships
per outside director (Jiraporn et al., 2008). It also would be valuable to determine the
optimum number of multiple directorships that can limit accrual-based earnings
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management and real earnings management.

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 ARJ Appendix
30,4

No. Industry N

1 Petrochemical indutries 14
412 2 Cement 12
3 Retail 14
4 Agriculture and food indutries 16
Table AI. 5 Industrial investment 14
Sample distribution 6 Building and construction 17
across industries 7 Real estate development 8
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About the authors

Kais Baatour is a Teaching Assistant at Tunis Business School, University of Tunis. He is a PhD
student of Accounting at ISCAE, University of Manouba. His research interests are in corporate
governance, financial reporting, earnings management, and international accounting. Kais Baatour is
the corresponding author and can be contacted at: [email protected]
Hakim Ben Othman is a Full Professor of Accounting at College of Business, University of Jeddah.
His main research interests include corporate governance, financial reporting, Islamic finance, and
earnings management. He has published in several scholarly international journals in Elsevier,
Taylor and Francis, Emerald and Inderscience. He is in charge of the accounting major curriculum
and he is deeply involved in the process of AACSB accreditation at TBS. He is committed to several
editorial activities. He has been a supervisor and an external examiner for a large number of PhD
students, both at local universities and abroad.
Khaled Hussainey is a Professor of Accounting at Portsmouth University (UK). His research
interests include voluntary disclosure; corporate governance; earnings management; capital structure
and dividend policy. One of his papers (Schleicher et al., 2007) was awarded the prize awarded
annually by the 3* British Accounting Review for the most outstanding paper published in the journal
each year. His achievement in terms of publications is outstanding. Currently, he has 50 published
papers. His publications appear in top ranked journals such as: Accounting and Business Research,
British Accounting Review, Journal of Accounting and Public Policy and International Review of
Financial Analysis.

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