directors. Experts in finance, in law, and in the firm's products and services bring value through diverse expertise; international directors bring value through diverse cultural experiences; and directors who are exposed to other boards add value by bringing diverse perspectives to board discussions. Effectively, each type of diversity broadens the scope of action and brings more perspectives to the board's attention. In a similar vein, female directors who are exposed to different experiences than men 4 (Hillman, Shropshire, and Cannella 2007) could enrich the discussions and improve the decisions made by the board.Research in organizational theory reveals that gender-diverse boards have more informed deliberations and discuss tougher issues that are often considered unpalatable by all-male boards (Clarke 2005;Huse and Solberg 2006;Stephenson 2004;McInerney-Lacombe, Billimoria, and Salipante 2008). Female participation also promotes more effective board communication (Joy 2008) to investors. Together, more informed board discussions and better communication improve the board's monitoring ability (Terjesen, Sealy, and Singh 2009;Groom 2009). Recent literature in finance (Adams and Ferreira 2009) shows that female directors exhibit greater diligence in monitoring and assume positions on committees charged with transparent reporting and earnings quality, such as auditing and corporate governance committees. In a recent working paper, Adams, Gray, and Nowland (2010) argue that female directors exhibit more independent thinking and improve the monitoring process. They further show that investors value the addition of female directors to the board. Jointly, better monitoring and lower information asymmetry facilitate better earnings quality.In our tests we use two measures of earnings quality. Our first measure is discretionary accruals quality (McNichols 2002;Francis, LaFond, Olsson, and Schipper 2005), computed as the absolute value of the estimation error in accruals after controlling for current, past, and future cash flows, sales and long-term assets, and operating cycle and volatility in sales. Our use of this measure is based on the argument in Francis et al. 2005 that discretionary accruals quality is (i) attributable to managers' estimates and accounting implementation decisions (in contrast to innate factors that are slow to change and attributable to the business model) and (ii) priced by investors' more than abnormal accruals and other proxies for accruals quality. Our second measure of earnings quality is the lower propensity among firms whose unmanaged earnings are just shy of earnings benchmarks to manage earnings and beat the benchmarks by a small amount. 5 Small increases (over the prior year's earnings) and surprises (over the analyst forecasts) constitute earnings components that are not likely to be related to firm performance. 6 We also conduct additional tests in which earnings quality is measured by lower performance-adjusted discretionary current accruals (Kothari, Leone, and Wasley 2005). Af...
