The effect of social ties between the CEO and board of directors and fiscal council's members on earnings management

Abstract

PurposeSocial factors can shape economic decisions. Corporate governance (CG) studies and guidelines usually neglect that the chief executive officer (CEO) and board members may be socially tied. This study investigates the effects of social ties between the CEO and board members on earnings management (EM).Design/methodology/approachThe authors run a series of regressions using a sample of Brazilian companies listed on the Brazilian Stock Exchange [B]³ between 2011 and 2017 to assess the effect of the social ties between the CEO and board members on EM using a social ties index. The authors also employ five robustness tests to verify the consistency of results, including alternative proxies of EM and social ties and an estimation using fixed effects.FindingsAfter developing and computing a social ties index between the CEOs and members of the board of directors (BD) and the fiscal council (FC), the study’s findings indicate that a significant level of social ties between the CEO and BD has a negative impact on EM. However, for FC members, the authors found non-significant results.Originality/valueUnlike previous studies, the authors built a social tie index (STI) from five elements of social ties assessed in an environment with a two-tier board system. Results show that elements of social interactions and personal relationships can benefit the company, as a CEO's level of social ties with the BD reduces EM practices.

The School-ties Between Top Management Executive and Audit Partner: Exploring From Earnings Management in Indonesia

“…Surprisingly, our results indicate that the existence of school-ties between the CEO and Auditor is positively associated with higher levels of earnings management, as measured by the Dechow model. In contrast, there is no evidence of a significant relationship between school-ties of the CFO and CEO, or the CFO and Auditor, and earnings management (Alkebsee et al, 2022; Chiu et al, 2013; Cohen & Zarowin, 2010; Fang et al, 2022; Ramos et al, 2023). We speculate that companies with school-ties may be more likely to engage in fraudulent behavior and compromise the independence of professional work.…”

“…We further analyzed the reasons for this finding and concluded that the CEO and Auditor school-ties might be sufficient to represent the company’s goals in improving earnings management. The CEO, as the top manager, has enough control over colleagues both inside and outside the company, even without the involvement of the CFO and the Auditor with school-ties (Alkebsee et al, 2022; Ramos et al, 2023).…”

“…This study addresses a research gap by investigating the influence of school-ties on earnings management in Indonesian companies, an area that has received limited scholarly attention (Alkebsee et al, 2022; Ramos et al, 2023). Our findings indicate that the presence of school-ties between top management and auditors is associated with a heightened propensity for earnings management, thereby posing potential drawbacks for investors.…”

Does corporate sustainability disclosure mitigate earnings management: empirical evidence from Jordan

“…The choice to estimate the parameters per year and with aggregated data was due to the characteristics of the Jordanian market and, consequently, the study sample in which the number of companies per sector/year is low and could bias the results. With this, concerns about changes in the general levels of accruals resulting from events that occurred in each year are mitigated since the intercepts of each model in each year already capture this effect in each estimation (Ramos et al 2022).…”