An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Bikki Jaggi
Rutgers University

Sidney Chimoon Leung
City University of Hong Kong

Abstract: This study examines whether the establishment of audit committees by Hong Kong firms would constrain earnings management, especially in firms with family dominance on corporate boards, a condition unique to Hong Kong. The study uses the methodology of three-stage (3SLS) regression analyses to control for the endogeneity between earnings management, voluntary establishment of audit committees, board size and firm performance. Regression analyses of 523 observations for the period of 1999-2000, when audit committees were established by Hong Kong firms for the first time, show that overall audit committees play a significant role in constraining earnings management. The effectiveness of audit committees in controlling earnings management is, however, reduced when the presence of family members on corporate boards is high.

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