Do Director Networks Matter for Financial Reporting Quality? Evidence from Audit Committee Connectedness and Restatements

Abstract

This study examines the effect of audit committee connectedness through director networks on financial reporting quality, specifically the misstatement of annual financial statements. Using network analysis, we examine multiple dimensions of connectedness and find that, after controlling for operating performance and corporate governance characteristics, firms with well-connected audit committees are less likely to misstate annual financial statements. In addition, our study demonstrates that audit committee connectedness through director networks moderates the negative effect of board interlocks to misstating firms on financial reporting quality. We conduct several tests to address identification concerns and find similar results. Our findings suggest that firms with better-connected audit committees are less likely to adopt reporting practices that reduce financial reporting quality.

Keywords: social networks, boards of directors, audit committees, corporate governance, financial reporting quality, restatements

JEL Classification: M40, M41, M42, G43