Internal governance and outside directors’ connections to non-director executives

73 Pages Posted: 17 Jun 2020 Last revised: 11 Jun 2021

See all articles by Anahit Mkrtchyan

Anahit Mkrtchyan

Northeastern University - D’Amore-McKim School of Business

Udi Hoitash

Northeastern University - Accounting Group

Date Written: June 7, 2021

Abstract

The monitoring effectiveness of outside directors is curtailed by information asymmetry between boards and management. Connections between outside directors and executives who do not serve on the board (internal ties) may help overcome this challenge by facilitating information sharing between the connected parties. Internal ties can also empower connected executives to withstand pressure from CEOs to take actions that might endanger their reputation in the long term. Alternatively, internal ties may entrench executives by insulating connected executives from adverse outcomes. Consistent with the former, we find that earnings restatements, class-action litigations, and real earnings management decrease when directors are connected with executives responsible for these areas. Connected boards also make better decisions related to CEO turnover, CEO succession and acquisitions. Overall, our results show that internal ties are associated with improved internal governance, thereby suggesting that boards may benefit from forging stronger relationships with non-director executives.

Keywords: Board monitoring, Internal governance, Information asymmetry, Financial reporting manipulation, Social networks.

JEL Classification: G34

Suggested Citation

Mkrtchyan, Anahit and Hoitash, Udi, Internal governance and outside directors’ connections to non-director executives (June 7, 2021). Available at SSRN: https://ssrn.com/abstract=3627698 or http://dx.doi.org/10.2139/ssrn.3627698

Anahit Mkrtchyan (Contact Author)

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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