Age diversity of audit committee financial experts, ownership structure and earnings management: Evidence from China

Abstract

The extant literature has shown the impact of demographic characteristics such as gender of audit committee members on earnings management but ignored the importance of the board room's age diversity. Going beyond the prior literature, our study aims to examine how the age diversity of audit committee financial experts (ACFEs) influences the financial reporting quality of Chinese non‐financial firms. We found a negative relationship between ACFEs' age diversity and earning management. Our findings also show that younger ACFEs mitigate earnings management as compared to older ACFEs. We further examined this relationship among state‐owned enterprises (SOEs) and privately owned enterprises in China and confirmed that the age diversity of ACFEs influences earnings management differently. However, younger ACFEs working in SOEs mitigates earnings management than their counterpart in privately owned companies. Our result maintains its robustness after controlling for endogeneity and employing a different measure of earnings management. Our result has relevance for selecting financial experts and the audit committee's overall composition, showing that including younger ACFEs will ensure more efficient control of firms' management. This finding is also relevant for policymakers, especially Chinese regulators, offering them insight into promoting audit committee effectiveness.