Making outside directors inside: Independent directors’ corporate site visits and real earnings management

Abstract

We examine whether corporate site visits by independent directors enhance their monitoring effectiveness. Exploiting a novel dataset from the Chinese market, we find that such visits have a negative effect on the extent of real earnings management, and identify vetoing board proposals as a potential channel through which site visits constrain real activities manipulation. The effects are more pronounced for independent directors with greater monitoring ability or stronger monitoring incentives, and for firms with weaker internal or external governance. We further document that the intensity of site visits has an incremental negative effect on real earnings management, the restraining effect could persist for at least two years, and site visits also reduce accrual manipulation. This paper sheds new light on independent directors’ active participation in corporate governance and has practical implications for institutional improvements.