Earnings manipulations and board's diversity: The moderating role of audit

This paper analyzes whether an audit index moderates the relationship between boardroom composition (gender diversity and foreign directors) and earnings-management activities in the European context. Data from a sample of 429 European firms listed on Stoxx Europe 600 Index from 1998 to 2017 are used to test a moderation model. Evidence reveals that board gender diversity is negatively associated with both accruals-based and real earnings management activities, while non-European directors are positively associated with the earnings-management activities. Further, audit index significantly moderates the link between board diversity and earnings-management. This study is unique in providing European evidence for the moderating effect of audit quality on the link between the demographic features of board members and the firm outcome. This paper is also relevant as it develops a composite index of audit quality.