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

Huang, H. & Wang, C. (2020) CFO network centrality and financial reporting quality. China Accounting and Finance Review, 22 (2), 1-34.

46 Pages Posted: 25 Feb 2021

See all articles by Henry He Huang

Henry He Huang

Yeshiva University - Sy Syms School of Business

Chong Wang

The Hong Kong Polytechnic University

Date Written: January 01, 2020

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

Suggested Citation

Huang, Henry and Wang, Chong, PaperThrough the Grapevine: The Effect of CFO Network Centrality on Financial Reporting Quality (January 01, 2020). Huang, H. & Wang, C. (2020) CFO network centrality and financial reporting quality. China Accounting and Finance Review, 22 (2), 1-34., Available at SSRN: https://ssrn.com/abstract=3790582

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States

Chong Wang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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