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Board Interlocks and Earnings Management Contagion


Peng-Chia Chiu


The Chinese University of Hong Kong (CUHK)

Siew Hong Teoh


University of California - Paul Merage School of Business

Feng Tian


University of Hong Kong - School of Business

November 15, 2010

The Accounting Review, Forthcoming

Abstract:     
We test whether earnings management (like a virus) spreads from firm to firm via board connections of shared directors (virus carriers). We use earnings restatements to identify firms that managed earnings and to identify the period when these firms manipulated earnings. We consider firms as infectious in the period when they manipulated earnings. We test whether the directors of the infected firms carry these earnings management behaviors to susceptible firms on whose boards they also sit on.

We find evidence of earnings management contagion in firms with interlocked boards. A firm sharing a common director with an earnings manipulator is more likely to manage earnings. The contagion is stronger when the shared director has a leadership position (e.g. board chair or audit committee chair) or an accounting-relevant position (audit committee member) in the susceptible firm. Contagion effects are not due to reverse causality effects, common industry shocks, geographical proximity, or common auditor firm. Contagion effects exacerbate earnings management incentives, such as M&A activities or situations associated with accounting fraud. Overall, the evidence supports the idea that economic behaviors such as earnings manipulation also spread through private social networks, and not just through public information channels.

Number of Pages in PDF File: 54

Keywords: Earnings Management, Restatements, Board Interlocks, Social Networks, Contagion, Governance

JEL Classification: M40, M41, M49, G34, G39, D83

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Date posted: December 12, 2010 ; Last revised: February 6, 2013

Suggested Citation

Chiu, Peng-Chia and Teoh, Siew Hong and Tian, Feng, Board Interlocks and Earnings Management Contagion (November 15, 2010). The Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1723714 or http://dx.doi.org/10.2139/ssrn.1723714

Contact Information

Peng-Chia Chiu
The Chinese University of Hong Kong (CUHK) ( email )
Hong Kong
Hong Kong
Siew Hong Teoh (Contact Author)
University of California - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
Feng Tian
University of Hong Kong - School of Business ( email )
Meng Wah Complex
Pokfulam Road
Hong Kong
China
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