External social networks and earnings management |
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| Institution: | 1. Martin Tuchman School of Management, New Jersey Institute of Technology, USA;2. Lally School of Management, Rensselaer Polytechnic Institute, USA;3. Fordham University, Bank of Finland, University of Sydney, USA;4. School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;1. School of Economics and Management, Beijing Jiaotong University, Beijing, 100044, China;2. School of Business, Renmin University of China, Beijing, 100872, China;1. University of Reading, Henley Business School, Reading, Berkshire, RG6 6BA, UK;2. University College Dublin, Carysfort Avenue, Blackrock, Dublin, Ireland;3. City University of London, Bayes Business School (formerly Cass), 106 Bunhill Row, London, EC1Y 8TZ, UK;1. The University of Auckland, New Zealand, Auckland CBD, Auckland, 1010, New Zealand;2. University of Pretoria, Pretoria, South Africa;3. University of Tasmania, Australia, Churchill Ave, Hobart, TAS, 7005;4. University of Newcastle, Australia, University Dr, Callaghan, NSW, 2308 |
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| Abstract: | Using a sample of U.S. listed firms for the 2000–2017 period, we examine how external social networks of top executives and directors affect earnings management in their firms. We find that well-connected firms are more aggressive in managing earnings through both accruals and real activities and that the results are robust after controlling for internal executive social ties. Using a difference-in-differences approach, we find that earnings management decreases after a socially connected executive or director dies. Additional analysis shows that connections forged by past professional working experiences have a greater impact on earnings management than connections forged by education and other social activities. Moreover, CFO social networks have a greater influence on earnings management than CEO social networks. Finally, we explore the underlying mechanisms, finding that 1) firms that are socially connected to each other show more similarities in their earnings management than firms that do not share a connection, and 2) more connected firms are less likely to incur accounting restatements. Collectively, our findings indicate that the external social networks of top executives and directors are important determinants of both their accrual- and real activity-based earnings management. |
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| Keywords: | Social networks Earnings management Accounting accruals Real activities M41 L14 D83 G39 |
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