Social Ties and Earnings Management

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

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

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)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Seoyoung Kim

Santa Clara University ( email )

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

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