How board refreshment shapes CEO power and earnings management: direct and moderating effects

Purpose This study aims to investigate the impact of board refreshment on chief executive officer (CEO) power and the consequent implications on the relationship between CEO power and earnings management. Design/methodology/approach We utilize data from S&P 1500 firms between the years 2006 and 2022. We employ three measures for CEO power, namely CEO duality, CEO entrenchment and CEO tenure. Regarding director refreshment, we utilize the Board Refreshment Index proposed by Dah et al. (2024), which focuses on director age, gender, nationality, educational background, financial expertise, board interlocks and board classification. Findings Results suggest that director refreshment is negatively associated with the three proxies of CEO power. Moreover, while CEO power increases earnings management in the absence of board refreshment, an increase in board refreshment significantly moderates this direct association. Practical implications Our findings provide practical guidance for regulators and policymakers aiming to strengthen corporate governance practices. Results indicate that promoting or requiring periodic board refreshment could be an effective mechanism to restrict CEO power and enhance financial reporting quality. Originality/value This study contributes to the literature by highlighting the role of director refreshment in restraining CEO power. Overall, our findings are consistent with the notion that CEO power inflates agency conflicts and exploitative managerial behavior. However, board refreshment enhances CEO oversight and scrutiny, limiting CEO power and the ability to engage in questionable financial practices.