Board Interlocks and Earnings Quality

Abstract:     
We build upon prior research on earnings contagion and provide evidence on how information about accounting practices, as reflected in earnings quality, transfers between interlocked firms in a broader accounting context. We first show that board interlocked firms’ earnings qualities are significantly associated and more so for audit committee interlocks, consistent with Chiu, Teoh, & Tian (2013) findings with respect to earnings restatements. We also find that these associations only arise after interlock formation and cease after interlock dissolution, indicating that endogeneity does not cause this association. In addition, we find that bad accounting, compared to good accounting, is more contagious and more strongly transferred via firms’ board interlocks. Last, we show that information transfers through board interlocks are bidirectional rather than unidirectional. Overall, in addition to providing confirming evidence for Chiu et al. (2013), we provide new, important evidence about the effects of the social context on financial accounting practices and recommend that future researchers keep social context factors in mind when investigating firms’ financial accounting practices.

Number of Pages in PDF File: 57

Keywords: Earnings quality, Board interlocks, Audit committee interlocks, Information transfer, Contagion, Corporate governance

JEL Classification: M40, M41, M42, M49, G34, G39, D83

working papers series