PaperThrough the Grapevine: The Effect of CFO Network Centrality on Financial Reporting Quality

Abstract

Being centrally positioned within a network affords easier access to information and resources, and also entails a higher reputation cost. However, network centrality can also facilitate the transfer of poor accounting practices and can lead to weak governance. We find that firms with CFOs who enjoy higher levels of network centrality have lower discretionary accounting accruals and a lower likelihood of restating their financial statements or engaging in accounting frauds. These firms also have a lower likelihood of internal control weakness and a higher level of accounting conservatism. Further analyses indicate that high-centrality CFOs are better at handling complex accounting issues such as revenue recognition, and the positive effect of CFO network centrality on accounting quality is more pronounced for firms with high litigation risk. Using the propensity score matching technique and changes analysis, we also provide evidence that our results are unlikely to be endogenously driven by firm characteristics. Overall, our evidence is consistent with CFOs using their central positions in the network to access information and resources to improve the quality of financial reporting and to protect their personal reputations.

Keywords: CFO network, financial reporting quality, earnings management, internal control quality, restatement

JEL Classification: G30 G41