Board Interlocks and Earnings Management Contagion

Chiu, Peng-Chia; Teoh, Siew Hong; Tian, Feng

doi:10.2308/accr-50369

Cited by 369 publications

(163 citation statements)

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“…It is therefore believed that companies that have connections with other firms have privileged access to a range of information, and this increases the possibility of learning new practices and applying them in the companies belonging to their networks. The results found are consistent with those from Kosnik (1987), Davis (1991), Mizruchi (1996), Haunschild (1993), Stearns and Mizruchi (1996), and Chiu et al (2013), and would contradict the findings of Mindzak (2013). Regarding the links between organizations via professionals on boards of directors, it is concluded that they influence in the adoption of corporate and accounting practices in the sample analyzed.…”

Section: Discussionsupporting

confidence: 54%

The Relationship Between Board Interlocking and Income Smoothing Practices

Ribeiro

Colauto

2016

Rev. contab. finanç.

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This study aims to investigate the influence of board interlocking in income smoothing practices in public companies with shares traded on the BM&FBOVESPA. To achieve this objective we adopted a sample comprised of 58 Brazilian companies included in the Bovespa index. The study is classified as empirical and analytical and uses as a proxy for income smoothing a metric called the "smoothing factor" (SF), obtained through the factor analysis technique using the metrics EM 1 and EM 3 from Leuz, Nanda and Wysocki (2003). As independent variables we employed indicators of social network analysis. From a theoretical point of view, the study is relevant and innovates in making the connection between the resource dependence theory, the agency theory and board interlocking. In practical terms, the study shows the effects of the constitutive elements of corporate social networks, arising from the board interlocking structure, on income smoothing accounting practices. Regression with panel data using fixed effects showed that the constituent elements of corporate social networks tend to influence the practice of smoothing in the sample used. The results of the study show that companies that share board members with other organizations which smooth their results tend to adopt this organizational practice more easily, which can be explained by: (i) companies causing variations in performance due to operational decisions or financial reporting choices; and (ii) managers making use of discretionary practices in the reporting of profits.

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Section: Discussionsupporting

confidence: 54%

The Relationship Between Board Interlocking and Income Smoothing Practices

Ribeiro

Colauto

2016

Rev. contab. finanç.

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“…In the context of North American companies there are the studies from Carrera (2013) and Chiu et al, (2013). Mindzak (2013) conducted a study on Canadian companies and Shi et al (2013) verifi ed the relationship between interlocking boards of directors and audit committees in the North American setting.…”

Section: Introductionmentioning

confidence: 99%

“…Studies demonstrate a connection between earnings management practices and interconnections between board members (Carrera, 2013;Chiu et al, 2013;Mindzak, 2013;Shi et al, 2013). In the context of North American companies there are the studies from Carrera (2013) and Chiu et al, (2013).…”

Section: Introductionmentioning

confidence: 99%

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Influence of board interlocking on earnings management

Cunha

Piccoli

2017

Rev. contab. finanç.

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The participation of directors on more than one board is called "board interlocking". This phenomenon contributes to the spread of management and governance practices, through directors sharing their knowledge and experiences on other boards. Thus, directors could "carry" the earnings management practices present in one company into another in which they sit on the board. It is assumed that the greater directors' direct or indirect connections on boards, the greater the sharing of information, especially information that can be reflected in company earnings quality. In light of the above, the aim of this study is to verify the influence of board interlocking on earnings management in companies listed on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa). The study is characterized as descriptive, quantitative, and documentary, and uses a sample of companies listed on the BM&FBOVESPA between 2011 and 2013. For earnings management, the model from Kang and Sivaramakrishnan (1995) was used, while for interlocking, degree centrality measures were used for direct board member connections, and intermediation centrality for indirect connections. The results indicate that earnings management is influenced by the interlocking of board members. It is concluded that the greater the degree centrality, the greater positive earnings management is, and that variations in positive and negative accruals are influenced by board member intermediation. The results reinforce the idea that earnings management behavior can be transferred between companies by the directors that make up their boards.

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“…In a recent paper, Chiu, et al (2013) find that earnings management spreads from firm to firm via board connection of shared directorship. Thus, standard accounting and earnings management practices provide both information and camouflage in measure-correlated industries.…”

Section: ⅱ Literature Reviewmentioning

confidence: 99%

Follow the Leader: Cross-Industry Herding in Earnings Management

Liu

Williams

Yin

2014

Glob Bus Financ Rev

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A B S T R A C TWe employ Vector Autoregressions and quarterly financial statement data to explicitly test for both own-and cross-industry earnings management "spillovers". We find that earnings management behavior can transmit from one industry to another, similar industry. Further, we find an indirect, information-based channel whereby earnings management information may reach less-related industries with a lag of about six months. These results provide initial evidence that managers within similar industries "herd" in their discretionary accrual strategies. That is, earnings management in one sub-industry classification provides an informative signal to other industries. Others, then, follow suit by adopting like strategies either for competitive parity or purely wealth-maximizing purposes. In addition, we find that earnings management is persistent and does not mean-revert. Thus, earnings management can have long-term permanent impacts on a firm and its financial statements. This paper presents both methodological and policy implications for the academic accounting literature. Keywords: Earnings Management, Accrual Strategy Ⅰ. IntroductionFormer SEC Chairman Levitt commented that earnings management was a "widespread" numbers game and that, if not addressed soon, would have adverse consequences for America's financial reporting system (Levitt 1998). Chairman Levitt's warnings are particularly relevant given that some investors completely rely on firms' reported financial statements, at their face value, due to their inability to process more sophisticated (i.e., footnote) information. In this paper (708) 534-4958 mwilliams15@govst.edu we examine two aspects of earnings management behavior. The first aspect is whether earnings management is (own) persistent or mean-reverting across time. The second aspect is whether, after controlling for own-persistency in earnings management, can earnings management in one industry "spillover" to another, related industry in a lead-lag fashion. Our results can help investors partially "undo" earnings management and hence have an unobstructed view of a firm's financial health.Unlike the prior, disjoint literature on these two issues, this study uses a modeling framework which simultaneously allows for both own-to-own and cross-to-own earnings management impacts across time. Additionally, the modeling framework explicitly incorporates time-lags clarifying causality unlike prior literature which uses effectively-contemporaneous, instrumental variable, two-stage least squares approaches. Using our methodologically-correct approach, we find evidence of both own-and cross-earnings management spillovers across time.

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Board Interlocks and Earnings Management Contagion

Cited by 369 publications

References 50 publications

The Relationship Between Board Interlocking and Income Smoothing Practices

The Relationship Between Board Interlocking and Income Smoothing Practices

Influence of board interlocking on earnings management

Follow the Leader: Cross-Industry Herding in Earnings Management

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