Empirical Study On The Relationship Between Interlocking Directorates And Earning Management

It is a general phenomenon that enterprises' decision would be affected by interlocking directorates.Interlocking directorates form board networks among enterprises.Interlocking directorates participate in the decision-making of the enterprises and communicate with other managers.It helps them get more massage and turn these networks into a potential channel to switch information.This channel assists interlocking enterprises acquire high-quality information and lower Information asymmetry which eventually influence the decisions that enterprises made.However,interlocking board network is invisible and its influence is potential,other market participants can hardly aware of it.Therefore,it is difficult for outsiders to see clues from the enterprise's financial statement,especially when the actions are concerned with earning management,because earning management itself is hard to be found.In recent years,the relationship between interlocking directorates and earning management becomes hot issues among scholars.Most of them study how interlocking directorates affect the enterprises' earning quality from the perspective of enterprise itself.However,few scholars study how interlocking directorates transmit earning management from one to anther from the perspective of the relationship between enterprises.There is little literature discussing the factors that might increase the possibility that behavior of earning management will transmit from target enterprise to interlocking enterprise.Therefore,we try to study how interlocking directorates affect earning management from this perspective.We use the data of all pubic companies from 2007 to 2013 as the sample to study the relationship between interlocking directorates and earning management.In order to confirm time point we need,we use restatement announcement to estimate whether an enterprise manages earnings.The results show as follow:First of all,if our target enterprise has the same director with the interlocking enterprise which is found managing their earnings,the target enterprise has higher possibility to manage earning as well.However,if this interlocking enterprise does not manage earnings,the target enterprise has lower possibility to manage earnings.Second,if the interlocking directorates also hold the post of the chairman of the board?committee member?CEO and so on,it will promote the action delivering among the enterprises.Thirdly,if two enterprises which share same directors belong to the same region or same industry,the possibility that earning management would delivery between the enterprises will be higher.To sum up,these findings indicate that interlocking directors,as agency between target enterprise and interlocking enterprise,play a vital role in transmitting the behavior of earning management among the firms.Especially when interlocking directorates hold other significant position in the enterprises,or target enterprise and interlocking enterprise belong to same region and industry,the transferring effects are better.