The effect of distracted audit committee members on earnings quality

In this paper, we examine the impact of distracting events to audit committee members on the firms’ earnings quality. Specifically, we focus on major events occurring simultaneously at other firms in which the audit committee members also serve as board members or CEOs. We find that during the years of major events, the number of board meetings at event firms significantly increases while there is no difference in board meetings at non-event firms. During this period, distracted directors miss more board meetings at the non-event firms than non-distracted directors. Consequently, firms with more distracted audit committee members have lower earnings quality. Our results indicate that director distractions, not director busyness, are associated with the decline in earnings quality. Notably, this decline in earnings quality at non-event firms is confined to the distraction years and audit committee members only. Our results have implications for shareholders and policy makers in assessing the tradeoffs between hiring experienced, qualified directors and the potential distractions that may result from their other commitments.