Roles of board of directors and earnings management across SMEs life cycle: evidence from the UK

Abstract

Purpose: This study aims to examine the role of the board of directors in affecting earnings management practices across small- and medium-sized enterprises (SMEs) life cycle.

Design/methodology/approach: Data is collected from 280 SMEs listed on the London Stock Exchange during the period of 2009–2016. Fixed effects regression analysis is used to test the hypotheses.

Findings: This study shows that the impact of the board of directors' roles on earnings management practices varies depending on the SMEs life cycle stage. In the introduction, growth and decline stages of SMEs, the wealth creation role of the board is negatively significant with earnings management, while the wealth protection role of the board is positively significant in the growth and maturity phases. Results suggest that the board's responsibility to create wealth deters early-stage earnings management strategies, while protecting shareholder interests, in latter stages, leads to a decrease in earnings management.

Practical implications: The findings suggest that corporate governance should be customized to the specific stage of the SMEs life cycle. Additionally, different life cycle stages may impose different requirements on corporate boards to shape the effectiveness of these mechanisms and constrain earnings management practices.

Originality/value: To the best of the authors’ knowledge, this study offers one of the first insights on the UK SMEs to understand how board functions and earnings management practices vary over SMEs life cycles. It will offer important information on the effect of board features on earnings management in SMEs in the UK and is anticipated to be of importance to policymakers, regulators, investors and practitioners.