Social Ties and Earnings Management

35 Pages Posted: 5 Nov 2009 Last revised: 7 Feb 2012

See all articles by Byoung-Hyoun Hwang

Byoung-Hyoun Hwang

Nanyang Business School, Nanyang Technological University

Seoyoung Kim

Santa Clara University

Date Written: February 6, 2012

Abstract

We detect a significant presence of social ties between the CEO and audit committee members and our results suggest that these informal ties play a material role in audit-committee oversight. In particular, we find a substantially stronger, positive relation between abnormal (i.e., discretionary) accruals and the extent of an audit committee’s connection to the CEO when we consider social ties in addition to the conventional ties. Moreover, we find that an audit committee’s social affiliation is associated with an increased discontinuity in the earnings distribution surrounding earnings targets. Together, our findings suggest that informal ties play a material role in facilitating creative accounting practices.

Keywords: Audit Committee, Social Ties, Earnings Management

JEL Classification: M4, G3

Suggested Citation

Hwang, Byoung-Hyoun and Kim, Seoyoung, Social Ties and Earnings Management (February 6, 2012). Available at SSRN: https://ssrn.com/abstract=1215962 or http://dx.doi.org/10.2139/ssrn.1215962

Byoung-Hyoun Hwang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Seoyoung Kim

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

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