CFO Social Ties to Non-CEO Senior Managers and Financial Restatements

Abstract

In this study, we examine how a CFO’s social ties with non-CEO senior managers in the same firm affect the likelihood of financial restatements. We categorize social ties as either professional or personal, and find that the two types of ties have distinct effects. Our findings show that CFOs’ professional ties with senior managers are associated with a lower likelihood of financial restatements. Interestingly, the effects of CFO personal ties are related to a firm’s operational performance, in that such ties are associated with a higher (lower) likelihood of financial restatements when operational performance is poor (good). Overall, our findings are consistent with the notion that CFO social ties with senior managers may give rise to both information sharing and arm-in-arm behavior.

Keywords: CFO, Social Ties, Financial Restatements, Financial Reporting Quality

JEL Classification: M40, M41