CFO/CEO-Board Social Ties, Sarbanes Oxley, and Earnings Management
Posted: 24 Jun 2011 Last revised: 19 Sep 2011
Date Written: March 21, 2011
Prior research suggests that the efficacy of a formally independent member of the board of directors could be undermined by social ties with the CEO. In this study, we examine the relation between CFO/CEO-board social ties and earnings management over the 2000-2007 time period. Our results suggest that CFO/CEOs picked more socially connected directors in the post-Sarbanes Oxley Act (SOX) time period (possibly as a way out of the mandated independence requirements). Our results also suggest a positive relation between CFO/CEO-board social ties and earnings management. Still, the increase in managerial/board risk aversion since SOX appears to have negated the effect of social ties on earnings management in the post-SOX period. Board independence and financial reporting quality remain topics of ongoing interest. The study is important in advancing our understanding of the role of social ties in earnings management.
Keywords: Social network, Earnings management, SOX, CEO, CFO
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