Effect of Independent Outside Directors and Board Size on Earnings Management in Saudi Family Businesses

Abstract

Background: The Board of Directors (BOD) has greater authority in a firm and is responsible for protecting investors from manipulation and monitoring companies. Few studies have analysed this relationship in family businesses.

Objective: This study investigates the relationship between the presence of independent outside directors, board size, and earnings management in Saudi family businesses before and after COVID-19.

Methodology: The sample comprises 42 firm-year observations from 21 family firms listed on the Saudi Stock Exchange from 2019 to 2020. This study used fixed effects, random effects, and OLS regression.

Results: The findings show a relationship between independent outside directors and board size on Earnings Management (EM) in Saudi family businesses from 2019 to 2020. However, following a robustness check and after splitting the sample, the results show a negative and significant effect of board size on earnings management pre-COVID-19, as a substantial board size has a crucial role in mitigating the level of EM practices in Saudi family businesses in 2019. Still, there is no significant relationship between board size and independent outside directors on EM in Saudi family businesses post-COVID-19 due to new procedures that have faced the BOD.

Conclusion: The Board of Directors is vital in influencing the quality of financial reports. So, the study has focused on internal Corporate Governance (CG) mechanisms, such as the presence of independent outside directors and board size in family businesses.

Unique contribution: This study contributes to the literature by providing an insightful analysis of the impact of the presence of independent outside directors and board size on manipulating earnings in Saudi family businesses.

Key Recommendation: By examining the role of independent outside directors and board size on earnings management, this paper contributes to the growing body of literature that connects board structure with financial reporting quality in emerging markets. The focus on family-owned firms adds value, given their unique governance dynamics and prevalence in the Saudi economy