| This study examines the association between chief executive officer (CEO) social connectedness and earnings quality, specifically discretionary accruals, accruals quality, and the likelihood of restating annual statements. In this study, a CEO's social network is established through her connections via the board of directors in her firm and connections via her board positions in other firms. CEO social connectedness is proxied by four network centrality measures: degree, closeness, betweenness and eigenvector centrality. These measures collectively identify the strength and extent of a CEO's connectedness in the network. Well-connected CEOs may have a significant number of useful contacts and can reach other board directors in the network easily and quickly. As a result, they can access more information and resources, which may help them implement more efficient internal controls, adopt better accounting practices, and make more reliable accounting estimates to improve earnings quality. On the other hand, social connectedness is also a source of influence and power. According to agency theory, well-connected CEOs may use their power to pressure their chief financial officers (CFOs) for biased financial reports, which could lower earnings quality. I find evidence that firms with well-connected CEOs are associated with larger absolute discretional accruals and poor accruals quality. The results of this study will contribute to the literature on earnings quality and social networks and also inform corporate stakeholders about potential financial reporting consequences when a firm has a CEO with strong social connections. |
