Abstract

This study investigates the impact of busy independent directors on earnings management in Chinese initial public offering (IPO) companies over the period 2008 to 2021. Utilizing various measures of busy independent directors. The research reveals a significant negative association.

In China's IPO landscape, research indicates a significant negative association between busy independent directors and earnings management. Busy directors, serving on multiple boards, may face time constraints but, intriguingly, companies with such directors show a lower inclination for earnings manipulation.

This suggests that, despite potential time pressures, the independent oversight provided by these directors serves as a deterrent to financial reporting manipulation in the context of Chinese IPOs, underscoring the importance of robust corporate governance structures for transparency and reliability between the presence of busy independent directors and earnings management in Chinese IPO companies.

The findings suggest that busy independent directors, driven by motives of reputation maintenance, effectively contribute to monitoring and governance, thereby constraining earnings management behavior. Additionally, the study identifies specific conditions that amplify the constraining effect, including lower independent director salaries, directors not serving locally, and a separation between the roles of chairman and general manager.

This nuanced analysis provides insights into the active role of busy independent directors in mitigating earnings management risks during the IPO process. The research contributes to a deeper understanding of the governance value associated with busy independent directors and offers novel perspectives on how stakeholders can influence and constrain earnings management in the context of IPO companies.

Employing a quantitative approach, the study enriches the literature by providing empirical evidence supporting the significance of busy independent directors in the Chinese stock market's governance landscape.

Keywords: Earnings management, Busy independent directors, IPO companies 

1.    Introduction

After the publication of the "Guiding Opinions on Establishing the Independent Director System in Listed Companies" by the China Securities Regulatory Commission in 2001, the supervision and governance effectiveness of independent directors in Chinese listed companies has become a hot research topic among scholars. The "Guiding Opinions on Establishing the Independent Director System in Listed Companies" serves as a foundational framework for enhancing corporate governance within listed companies.

This regulatory document emphasizes the pivotal role of independent directors in fostering transparency, accountability, and sound decision-making. It likely outlines specific mandates for the appointment of independent directors, detailing qualifications that prioritize expertise, experience, and independence from company management.

The guiding opinions are expected to delineate the responsibilities of independent directors, including active participation in audit committees, risk management, and strategic decision-making processes. The document likely advocates for robust reporting mechanisms, ensuring direct communication between independent directors and shareholders, as well as avenues for reporting governance concerns.

To further bolster the effectiveness of the independent director system, the guiding opinions may underscore the importance of continuous training and development for these directors. Additionally, the document may address potential concerns, such as conflicts of interest or challenges associated with the efficacy of independent directors. For an accurate and detailed understanding, it is recommended to refer directly to the specific document or official sources from the relevant regulatory body.

The increasing phenomenon of independent directors holding multiple positions has sparked continuous debate on whether busy independent directors can effectively fulfill their roles within the corporate governance framework. Scholars have been continuously debating whether busy independent directors can effectively exercise supervisory roles in corporate governance.

Fama and Jensen (1983) proposed the reputation hypothesis, suggesting that serving as an independent director for multiple listed companies can demonstrate the reputation, quality, and professional skills of directors to the external director labor market.

Busy independent directors with high reputation can leverage their rich professional experience and diverse channels of information access to better fulfill their supervisory responsibilities and enhance corporate governance efficiency.

Studies such as Gilson (1990), Masulis and Mobbs (2011), Zheng et al .(2017) and Jiang et al.(2020) report confirming evidence for this reputation hypothesis. However, Ferris et al. (2003) put forward the busyness hypothesis, suggesting that independent directors with multiple directorships may not be able to allocate sufficient time and energy to effectively fulfill their supervisory role in each company, and it is supported by various studies such as Fich and Shivdasani (2006), Falato et al. (2014) and Li et al (2017)

It can be seen that domestic and foreign scholars have not yet reached a consensus on whether busy independent directors in companies conform to the "busyness hypothesis" or the "reputation hypothesis". For IPO-listed companies, due to the lack of capital market experience, companies rely on the extensive professional expertise of diligent independent directors to better supervise and govern the company (Field et al., 2013).

In recent years, Chinese companies have commonly engaged in earnings management practices during the IPO process to meet listing requirements and manipulate performance indicators. The earnings management practices in IPOs not only result in accounting information distortion and mislead investor decisions, but also harm long-term enterprise development, significantly impacting the healthy operation of China's capital market.

Currently, limited studies have examined the performance of busy independent directors from the perspective of earnings management in IPO companies. The earnings management practices of Chinese enterprises during their IPO require urgent supervision and governance. So, are busy independent directors in Chinese IPO-listed companies more in line with the "busyness hypothesis" or the "reputation hypothesis"?.

Therefore, this study first focuses on what impact busy independent directors have on earnings management behavior in IPO companies from reputation theory and busyness theory. Secondly, would the influence of busy independent directors on earnings management behavior in IPO companies differ due to variations in their salary, location of service, and the corporate governance structure of the companies they serve?

The research contribution of this study lies in the following aspects: firstly, it is the first study to examine the impact of busy independent directors on earnings management behavior in IPO companies using two different theories. Thus, it enriches the theoretical research on factors influencing earnings management in China.

Furthermore, this study delves into the heterogeneity of factors such as independent directors' salary, local of service, and corporate governance structure, which is conducive to unveiling the black box of busy independent directors' performance and deepening the understanding of their supervisory efficiency. Finally, this study provides empirical support for the reputation hypothesis, offering a reference basis for the selection of independent directors in IPO-listed companies.

2. Literature Review and Hypotheses Development

2.1 Busy independent directors and earning management

In order to meet listing requirements and maintain continuous profitability after initial IPO, Chinese companies often employ earnings management techniques such as accounting policies and changes in accounting estimates to increase discretionary accruals and thereby manipulate financial statements (Liu & Lü, 2015; Gong et al., 2021).

This kind of earnings management behavior seriously affects the authenticity of accounting information, leading to a series of issues such as information asymmetry and a significant increase in agency costs. Not only effecting the interests of investors, but it also undermines the value discovery and resource allocation efficiency of China's capital market (Huang & Li, 2016). It is not conducive to the value enhancement and future growth of the Company in the long run.

The independent director system, as an important component of internal corporate governance mechanisms, is crucial for enhancing the earnings quality of IPO companies, particularly with the increasing phenomenon of independent directors holding multiple positions, and the effective exercise of their supervisory role.

Based on the "busy hypothesis” serving as an independent director in multiple companies implies that their limited time and energy need to be allocated to more enterprises, increasing the likelihood of their absence from important meetings (Ferris et al., 2003). This consequently results in a lack of detailed understanding of crucial information about the company, thereby undermining their effectiveness in oversight and advisory roles (Fich & Shivdasani, 2006).

Sharma and Iselin (2012) found that the higher the number of busy independent directors in the audit committees of listed companies, the higher the probability of financial misreporting. Miriam and Michael (2013) found in their study that close to two-thirds of board meetings in the board of directors are focused on supervisory issues. With the increase of busy independent directors in the board, the supervisory capability of the board significantly decreases.

Duan (2016) investigated the impact of busy directors on board supervision, advisory efficiency, and firm performance using Chinese SME board-listed companies as samples. The study found a negative correlation between busy directors and board supervision efficiency. Furthermore, it revealed that busy directors did not improve the performance of companies characterized by "high supervision costs and low advisory needs."

Ferris and Liao (2022) found that companies with a higher proportion of busy independent directors or busy chief executive officers more extensively manage their earnings. Especially in IPO-listed companies, the frequent financial packaging and earnings management prior to listing urgently require busy independent directors to exercise their supervisory and governance roles.

However, due to the limited capacity of active independent directors, it becomes challenging for them to provide timely and effective supervision. In contrast, the management in a position of informational advantage tends to exploit information asymmetry by concealing negative information, thereby resulting in a sustained decline in the quality of company earnings.

On the other hand, based on the reputation hypothesis, serving as an independent director for multiple companies represents a higher level of reputation and professional expertise (Fama & Jensen, 1983). As an important basis for measuring the human capital value of independent directors, the reputation mechanism provides sufficient motivation for busy independent directors to diligently perform their duties in order to uphold their own reputation, thereby exerting effective supervisory and governance roles.

Wang and Lu (2013) found that busy independent directors can exert more effective monitoring roles to enhance the quality of accounting information disclosure in listed companies.

Busy independent directors can fulfill their supervisory duties by establishing a comprehensive and rational control and oversight mechanism, thereby effectively enhancing the reliability of corporate financial information and constraining earnings management practices within the company.

Cai et al. (2017) found that busy independent directors with accounting expertise can effectively reduce the degree of earnings management in a company, thereby exerting a more effective governance role in the organization. Tham et al. (2019) found that directors with multiple board seats limit the extent of earnings management in companies by sharing experiences, skills, information, and other resources.

Consequently, companies with multiple directors on the board exhibit lower levels of earnings management. With the rise and development of the independent director talent market in our country, busy independent directors generally possess a high reputation and abundant professional experience.

IPO companies, which lack experience in capital market management, urgently require the supervision and management of busy independent directors. When appointing independent directors, IPO companies also attach great importance to reputation assessment.

Busy independent directors, in order to safeguard their own reputation, will inevitably utilize their expertise, experience, and resources to actively fulfill their supervisory and advisory functions, thereby improving the quality of corporate information and effectively suppressing earnings management behaviors of IPO companies. 
Based on the discussion above, this study proposed the following competitive hypotheses:

H1a：From reputation theory, busy independent directors in IPO companies can effectively constrain earnings management behavior.
H1b：From busyness hypothesis/ theory, busy independent directors in IPO companies may accelerate the deterioration of earnings management behavior.

2.2 Heterogeneity factors independent directors' salary, local of service, and corporate governance structure

The purpose of this study is to examine the relationship that exists between the characteristics of the board of directors and the ownership structure and the incidence of managerial opportunistic behavior, namely the manipulation of accounting profitability. This research contributes to the body of literature by examining the effects of corporate governance frameworks at the firm and national levels on earnings management in the Spanish business sector.

The findings show that how accounting discretion is used is a clear indicator of how well corporate governance systems are working. We have found evidence that the practice of earnings manipulation decreases as the voting rights of the controlling shareholder increase.

In addition, we have seen a correlation between insider ownership and earnings manipulation that takes the form of an upside-down U.

In terms of board attributes, we discover that larger, independent boards with a higher percentage of female members and an audit committee with a higher percentage of outside independent directors are better at managing managers. This restricts the managers' capacity to influence profits. Conversely, the presence of two boards increases the likelihood of participating in shady financial reporting manipulation. 

3. Research design

3.1   Sample Selection and Data Source

The main subjects of this study were IPO-listed companies in China from 2008 to 2021, and the following procedures were conducted on the initial sample for verification by excluding: (1) companies in the financial industry from the IPO-listed companies; (2) companies with missing relevant data during the research period, resulting in a final sample of 2,918 companies.

To overcome the influence of outliers, Winsorization treatment (top and bottom 1%) was applied to handle abnormal values. The financial data of sample companies were sourced from CSMAR and WIND databases, while busy independent director data was manually curated. Excel was used for preliminary data processing, and Stata17 was employed as the statistical software. 

3.2 Measurement of variables

3.2.1 Busy Independent Director

This study assesses the impact of Busy Independent Directors (BUSY) on earnings management using three factors: BUSY1, BUSY2, and BUSY3. The techniques put out by Jiang et al. (2020) and Cashman and Gillan (2012) serve as the foundation for this assessment.

According to the busyness hypothesis, which aims to capture the extent of their busy schedules, BUSY1 measures the number of independent directors in the organization who have numerous board commitments.

BUSY2 provides a sophisticated perspective that is applicable to both busyness and reputation theories by quantifying the ratio of active independent directors to all independent directors. While a higher percentage might suggest positive reputations, it also raises concerns about overactivity.

The placeholder variable BUSY3, which denotes the intentional hiring of directors who are already preoccupied with other obligations, is more closely related to reputation theory. This large set of variables makes it possible to analyse in detail how active independent directors affect earnings manipulation while taking workload and reputational issues into account.

3.2.2 Earnings Management

For the measurement of earnings management (DA), this study follows the approach of Dechow et al. (1995) and adopts the cross-sectional adjusted Jones model to estimate the non-discretionary accruals of the firm, ultimately isolating discretionary accruals. The absolute value of discretionary accruals is used to gauge earnings management.

3.2.3 Control Variables

Drawing on the research findings of Quan and Yao (2015) and Jiang et al. (2020), we also included control variables such as leverage (LEV), return on total assets (ROA), firm size (SIZE), ultimate controlling shareholder's nature (CONTROL), percentage of shareholding by the largest shareholder (FIRST), board size (BOARD), ownership balance (DR), asset turnover (ATO), degree of marketization (MARKET), proportion of independent directors (IDRATIO), ownership concentration (OC), whether audited by the big four accounting firms (BIG), industry (IND), and year (YEAR). The detailed definitions of the variables involved in the model are provided in Table 1：

Table 1：List of variables and their measurements

3.5   Model Specification

To examine the impact of busy independent directors on earnings management in IPO companies, following the approach of Bouaziz et al. (2020), this study constructs the following model:



In the model, DA represents the degree of earnings management for IPO companies, BUSY is an indicator of busy independent directors in IPO companies, and CVS includes other control variables. Year, and Ind, which represent fixed effects for year and industry, respectively. This study reports both OLS tests and PSM matching test results.

Differentiating between BUSY and DA in the context of Busyness Theory and Reputation Theory:

Regarding Reputation Theory and Busyness Theory, we can explain the difference between BUSY and DA in the provided model, where DA denotes the degree of earnings management, BUSY serves as a proxy for independent directors involved in initial public offerings (IPOs), and CVS includes other control variables.

According to reputation theory, independent directors with a lot of duties should take precautions to safeguard their reputation by getting involved in governance and monitoring processes.

It is possible to understand the term BUSY in this context as a stand-in or alternative to the standing of independent directors. The director's busy schedule and several board positions indicate that they have a good reputation for competence, expertise, and governance abilities.

The Reputation Theory suggests that lower levels of earnings management (DA) are associated with the presence of busy independent directors (BUSY). Directors strive to uphold moral principles and strengthen the reliability of financial reporting because they are conscious of their reputation.

As a result, there is expected to be a negative correlation between the frequency of earnings management and the busyness of an organization's independent directors. This suggests that companies with busy independent directors are less likely to participate in financial performance manipulation.

The negative effects that can occur when directors are excessively busy are the main emphasis of the busyness theory. It suggests that directors may find it challenging to fulfill their oversight and governance responsibilities effectively if they hold an excessive number of board positions.

In the model's context, the term "BUSY" might refer to a director's workload, with a higher workload potentially associated with a higher likelihood of participating in earnings management (DA).

The justification for this is that overly busy directors might not have the time or attention to carefully oversee financial reporting practices, which could eventually lead to an increase in profit manipulation.

Busyness Theory states that there should be a positive association between managing one's wages and being busy. Accordingly, companies with busier independent directors are probably going to have higher degrees of earnings management.

Examination of the Model's Outcomes: Analyzing the direction and statistical significance of the coefficients associated with BUSY in both OLS and PSM matching tests is crucial for differentiating between the effects of BUSY and DA in the empirical findings.

Reputation Theory suggests that independent directors with high levels of commitment are associated with less profit manipulation; a negative and statistically significant coefficient for the variable "BUSY" would support this idea. On the other hand, Busyness Theory would be supported by a positive and statistically significant coefficient for BUSY, indicating a possible positive association between busyness and earnings management.

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4.    Results and Discussion

 4.1   Descriptive Statistics

Table 2 presents the descriptive statistics of the main variables. The mean value of earnings management (DA) for IPO companies in the sample is 0.1334, with a maximum value of 2.1616. It can be observed that Chinese listed companies commonly engage in significant earnings management practices during their initial public offerings.

The explanatory variable (BUSY1) which represents the number of busy independent directors, has a mean of 0.7523. This indicates that, on average, IPO-listed companies employ approximately 1 busy independent director. The standard deviation is 0.9420, with a maximum value of 5. This suggests significant variation in the hiring of busy independent directors among different IPO companies.

The average value of the proportion of busy independent directors (BUSY2) is 0.3416, indicating that, on average, busy independent directors account for 34.16% of all independent directors in IPO-listed companies. This suggests that IPO-listed companies lacking capital market experience are in urgent need of highly skilled and experienced busy independent directors to fulfill their supervisory and governance roles.

4.2   Correlation Matrix

Table 3 presents the Pearson correlation analysis of the main variables. There is a significant negative correlation between earnings management (DA) in IPO companies and the number of busy independent directors (BUSY1) and the proportion of busy independent directors (BUSY2) at the 1% and 5% levels, respectively.

This indicates that a higher number of busy independent directors in IPO companies can significantly suppress earnings management behavior. Moreover, a higher proportion of busy independent directors among independent directors can significantly enhance the monitoring function and improve the earnings quality of IPO companies.

These results provide preliminary evidence in support of hypothesis 1a and reject hypothesis 1b. Additionally, the correlation coefficients among the model variables are all less than 0.5, indicating that there is no serious issue of multicollinearity in the model.

Table 3：Correlation Matrix of Main Variables

Notes: ***, **, * denotes 0.1%, 1%, and 5% level of significance. 

4.3   Univariate tests

Table 4 presents the results of the univariate analysis between busy independent directors (BUSY2) and earnings management in initial public offering (IPO) firms (DA). The test results indicate that companies with a higher proportion of busy independent directors on the board exhibit significantly lower levels of earnings management in

IPO firms compared to companies with a lower proportion of busy directors on the board, at a significance level of 10%. This finding suggests that busy independent directors have a significant inhibitory effect on earnings management in IPO firms, further confirming hypothesis 1a.

Table 4：Univariate tests

4.4   Regression Analysis

The data set is initially put through a series of tests before data analysis to identify the most relevant model for inferences and hypothesis testing. The results of the heteroskedasticity test in Table 5 show an insignificant P-values of 0.6929 and 0.6829 respectively.

As the chi-square probability is greater than the 5% level of significance, the test results confirm that there is no heteroskedasticity. In the model, the mean VIF is as low as 3.38 as shown in Table 5, indicating that the independent variables do not exhibit significant multicollinearity.

Table 5 examines the impact of the number of busy independent directors (BUSY1) and the proportion of busy independent directors (BUSY2) on earnings management (DA) in IPO-listed companies.

The multiple regression results indicate that both the number of busy independent directors (BUSY1) and the proportion of busy independent directors (BUSY2) are significantly negatively correlated with the earnings quality of IPO-listed companies (DA) at a significance level of 5%.

The results indicate that busy independent directors contribute to constraining earnings management behavior in IPO companies. The conclusion confirms hypothesis 1a and rejects hypothesis 1b. The results indicate that busy independent directors, in order to uphold their personal reputation, actively fulfill their supervisory and advisory roles using their expertise, experience, and resources. As a result, they effectively inhibit earnings management behavior in IPO companies.
Table 5: Multiple Regression Results

Notes: ***, **, * denotes 0.1%, 1%, and 5% level of significance. 

5.    Additional Analysis: A Study on the Heterogeneity Factors of Busy Independent Directors.

From the above research results, it can be observed that busy independent directors play a role in corporate governance by providing supervision and constraint, thereby restraining earnings management behavior in IPO companies. Maintaining the independence of busy independent directors is of great significance in corporate governance.

We examined several factors that may affect the independence of busy independent directors, including their salary, whether they serve locally, and whether the chairman and general manager are held by the same person. These factors may influence the fulfillment of the supervisory duties of busy independent directors, and we conduct further research on them.

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5.1   Busy Independent Directors and Earnings Management in IPO companies: Independent Director Salary

The salary of independent directors is an important topic in the field of corporate governance. The salary of independent directors should be reasonable, aligning with best practices in corporate governance, and ensure the independence and supervisory role of independent directors.

Beasley et al. (2009) argues that highly compensated independent directors tend to maintain close relationships with the management, which diminishes their ability to provide independent oversight of the management. Does the constraining effect of busy independent directors on earnings management in IPO companies depend on the independent directors' salary?

In this study, the full sample was divided into two groups for regression analysis based on the average salary of independent directors in listed companies. From the categorical regression results in Table 6, it can be observed that in companies with lower independent director salary levels, both the number of busy independent directors (BUSY1) and the proportion of busy independent directors (BUSY2) are significantly negatively correlated with IPO earnings management (DA).

These correlations have passed the significance test at a 10% level. In contrast, in the high independent director salary group, there is no significant correlation. Companies with higher remuneration for independent directors exhibit a stronger inhibitory effect on earnings management by busy independent directors in companies with lower salary for independent directors. In IPO firms, higher salary may undermine the independence and supervisory effectiveness of busy independent directors, thus limiting their ability to effectively constrain management's earnings management behavior.

Table 6: Regression Results for Heterogeneity Test Based on Independent Director Compensation.

Notes: ***, **, * denotes 0.1%, 1%, and 5% level of significance. 

5.2   Busy Independent Directors and Earnings Management in IPO companies: Location of Service

A key factor influencing their performance is the location where they work, according to research on the impact of busy independent directors on earnings management in initial public offerings (IPOs). Local appointees affect their obligations in two ways. Being close enhances one's capacity for oversight and information gathering, resulting in more efficient monitoring.

However, there are advantages and disadvantages to this scenario in China. The physical proximity of people in a given region may promote the growth of interpersonal relationships. On the other hand, this could compromise the independence of locally serving independent directors by reducing their capacity to effectively stop unethical management practices.

For the aim of group testing, the study divides the participants into two groups: "local positions" and "non-local positions" in order to investigate this phenomenon. The results show a noteworthy inverse association between the manipulation of earnings (DA) in organizations with directors serving in several areas and the quantity (BUSY1) and ratio (BUSY2) of active independent directors.

Nevertheless, no clear correlation exists within the local employment group. The influence of traditional Chinese society can help to understand the differences in supervisory tasks between local and remote directorships.

In this culture, distant directorships are linked to a higher degree of independence, although busy independent directors could put connection maintenance ahead of their monitoring duties.

The findings emphasize the need of considering particular characteristics within the local context of corporate governance and the subtle influence that active independent directors have on the manipulation of financial performance.

Table 7: Heterogeneity Test Regression Results based on Local Independent Directors.

Notes: ***, **, * denotes 0.1%, 1%, and 5% level of significance. 

5.3   Busy Independent Directors and Earnings Management in IPO companies: Two Jobs In One

This study looks into the relationship between actively participating independent directors and financial results manipulation in initial public offerings (IPO) companies. It focuses on the effects of a publicly traded company's organizational structure, especially the joint roles of chairman and general manager.

The study draws on the findings of Xie and Wang (2006) to highlight the fact that holding both of these roles tends to reinforce authority, which may compromise the independence and efficacy of the board's oversight. However, separating the positions of general manager and chairman strengthens the board's independence and increases the effectiveness of supervision, lowering the possibility of management overconfidence.

The research assesses whether the combination of active independent directors' dual duties influences their impact on earnings manipulation. The "combined CEO-Chairman" and "separated CEO-Chairman" groups comprise the sample.

According to the regression analysis, in companies with a distinct structure for the chairman and general manager, there is a substantial negative link between the number (BUSY1) and proportion (BUSY2) of busy independent directors and earnings management (DA).

However, no significant correlations were found in the companies with consolidated positions. This suggests that busy independent directors have a higher influence on minimizing earnings manipulation when different people hold the offices of general manager and chairman.

This emphasizes how important the company governance framework is in figuring out how busy independent directors may enhance the quality of profitability.

5.    Robustness analysis

To verify the robustness of the above conclusions, this study employed the method of replacing certain variables. By introducing a dummy variable, BUSY3, to replace the explanatory variable of busy independent directors, the results remained unchanged. Furthermore, the robustness of the conclusions was tested by altering the sample size.

As the manufacturing industry represents a traditional sector and has the highest number of IPO-listed companies based on industry distribution, it was considered that the differences between industries might have an impact on the research results. Therefore, this study retested the conclusions by excluding other industries and only retaining the manufacturing industry sample. The results remained largely unchanged. This indicates that the previous conclusions are relatively robust.

6.    Correction for possible endogeneity

The constraining effect of busy independent directors on earnings management in IPO firms may suffer from endogeneity issues. Therefore, this study employs the Propensity Score Matching (PSM) method to address the interference of endogeneity on the conclusions. Whether to hire busy independent directors (BUSY3) is used as the dependent variable for propensity score matching.

Table 9 presents the differential results of the basic characteristics of variables before and after matching. The changes in the t-values reveal that after matching, all variables no longer exhibit significant differences.

Taking firm size (SIZE) as an example, the t-value changes from 3.68 before matching to 1.00 after matching. The standardized bias of all variables after matching is less than 10%, indicating that the selected conditioning variables in this study are reasonable, and the overall matching effect is satisfactory.

Table 9: Comparison of differences before and after matching variables

Table 10 presents the average treatment effect (ATT) of Propensity Score Matching (PSM). It can be observed that both nearest neighbor matching and kernel matching pass the significance test at the 5% level, both before and after matching.

Taking nearest neighbor matching as an example, the results indicate that, after controlling for other major characteristics of firms, IPO firms' absolute value of discretionary accruals, which reflects earnings management, decreases by an average of 9.22% (=0.013/0.141) when they employ busy independent directors.

This suggests that busy independent directors significantly constrain earnings management behavior in IPO firms. The robustness of the analysis is supported, indicating that the empirical results are not affected by endogeneity.
 

Table 10 PSM average treatment effects
Notes: ***, **, * denotes 0.1%, 1%, and 5% level of significance. 

7.    Conclusion and Implication

This study focuses on the performance of busy independent directors in Chinese IPO-listed companies from 2008 to 2021. The research findings are as follows: firstly, busy independent directors in IPO-listed companies can effectively restrain earnings management behavior through the maintenance of their own reputation and the sharing of experiences, skills, information, and other resources.

Secondly, heterogeneity analysis reveals that the constraining effect of busy independent directors on the earnings management of IPO companies was more pronounced in companies with lower independent director salary, companies with busy independent directors not serving locally and companies where the chairman and general manager are not the same person. 

The main insights from this study are as follows: first, IPO companies lacking experience in the capital market should pay attention to the reputation and expertise of busy independent directors when appointing them.

They should fully utilize their diversified professional experience and governance capabilities to improve earnings quality. Second, the independence of busy independent directors is of significant importance for the governance environment and value enhancement of the company.

IPO companies should continuously enhance the independence of busy independent directors, improve the structure and allocation of responsibilities within the company's internal governance mechanisms, and create a favorable internal governance environment. This will effectively leverage the supervisory and governance functions of busy independent directors.

8.    Limitations of the Study

While the findings of this study provide valuable insights into the role of busy independent directors in constraining earnings management in Chinese IPO-listed companies, several limitations should be acknowledged.

First, caution is warranted in generalizing these results to companies outside the Chinese context, as regulatory, economic, and cultural factors unique to China may influence the effectiveness of busy independent directors differently elsewhere.

Second, reliance on historical financial and governance data introduces potential concerns about data accuracy, completeness, and reporting biases. Future research could benefit from more comprehensive datasets and qualitative methods to validate the quantitative findings.

Additionally, establishing causation between the presence of busy independent directors and reduced earnings management poses challenges, and further investigation into causal mechanisms is warranted.

The dynamic nature of the business environment over the study period and the choice of specific metrics for earnings management also merit consideration in interpreting the results. These limitations underscore the need for a nuanced understanding of the study's implications and highlight avenues for future research refinement.

10.  Future Research Directions

Looking ahead, future research can address these limitations and deepen our understanding of the relationship between busy independent directors and earnings management in IPO companies. Exploring the long-term impact of busy independent directors beyond the studied period could reveal whether their initial positive effects persist over time or exhibit diminishing returns.

Qualitative studies, such as interviews or case analyses, can provide richer insights into the mechanisms through which busy independent directors influence decision-making processes. Cross-country comparisons can shed light on the contextual factors shaping the effectiveness of busy independent directors, offering valuable insights for corporate governance practices globally.

Investigating board dynamics and interactions among busy independent directors, executive management, and other board members can provide a more nuanced view of governance effectiveness.

Furthermore, exploring the interplay between busy independent directors and other governance mechanisms, as well as conducting industry-specific analyses, can enhance our understanding of the broader governance landscape. These future research directions aim to refine the understanding of busy independent directors' roles and contribute to the ongoing discourse on effective corporate governance.

 

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