Board Interlocks And Earnings Management Contagion

From the perspectives of static and dynamic analysis, the current research for the first time investigates the mechanism behind the effects of interlocking directorates on companies’ earnings management innovatively. In addition, taking the attributes of interlocking directorates into consideration, the paper further gives insight into the influence of independence and correlation among interlocking directorates on the likelihood of companies to make earnings management. An empirical analysis is applied by constructing and testing two panel datasets, consisting of data from 2008 to 2013 and 2008 to 2009 respectively. The results show that there are significant effects of interlocking directorates on companies’ earnings management likelihood.Static analysis results indicate that:(1) A listed company having interlocking directorates is more likely to manage earnings, and the more the interlocking directorates are, the greater the likelihood of earnings management is but the motivation will be diluted. (2) From the point of interlocking directorates’ independence, it will enhance the motivation to manage earnings of a listed company. More specifically, when the interlocking directors are independent, the company will be more likely to manage earnings; while when the interlocking directorates are non-independent, the promotion effect will be insignificant. (3) From the point of interlocking directorates’ correlation, it will promote the likelihood to manage earnings. To be specific, when there are interlocking director serve as the chairman of the board (including deputies), the possibility will be greater, and the possibility will increase significantly with the number of interlocking directors who are the chairman of the Board (including deputies); while when there are interlocking director serve as finance positions, it will not increase the possibility of earnings management obviously.On the other hand, dynamic analysis results indicate that:(1) when there are "contagious" interlocking directorates, the exposed companies are more likely to be infected, the likelihood to manage earnings increased. As a result, there is a existing situation to imitate each other by interlocking directorates, that is, the dynamic contagion of interlocking directorates will cause the exposed companies to be infected and then mimic the contagious companies’earnings management behavior. (2) From the point of "contagious" interlocking directorates’correlation, regardless of they are independent or non-independent, they will both increase the likelihood of the exposed companies to be infected to manage earnings without any qualitative difference. And further, the likelihood of exposed company to manage earnings will be greater when "contagious" interlocking directorates are independent than non-independent. That means, there is a quantitative change in contagious process that the contagiosity is greater if the "contagious" interlocking directorates are independentLeveraging regression analysis, this study allows us to better understand the underlying mechanism of how interlocking directorates impact corporate governance performance. It not only fills the gaps of dynamic research in this field, but also provides a theoretical support for regulatory authorities to normalize part-time directors’behavior, as well as a practice guide to improve corporate governance.