Board Interlocks and Earnings Quality

• In Event: Financial Accounting and Reporting 5

Abstract

We document evidence on how information about accounting practices, as reflected in earnings quality, transfers between interlocked firms. We first show that board interlocked firms’ earnings qualities are significantly associated, and more so for audit committee interlocks. We also find that these associations only arise after interlock formation and cease after interlock dissolution, indicating that endogeneity does not drive the association. In addition, we find that bad accounting, compared to good accounting, is more contagious and more strongly transferred via firms’ board interlocks. Last, we show that information transfers through board interlocks are bidirectional rather than unidirectional. Overall, we document preliminary evidence about the importance of the social context for financial accounting practices and recommend that future researchers keep social context factors in mind when investigating firms’ financial accounting practices.

Authors

• Linna Shi, Binghamton University, SUNY

• Ravi Dharwadkar, Syracuse University

• David G Harris, Syracuse University