Board Interlocks And Real Earnings Management Convergence

Under the background of the economic transition in our country,many formal systems are not adequately supplied.As an implicit contract and supplementary mechanism,"relationship" culture exists extensively in micro-enterprises,which has an important impact on the survival and development of micro-enterprises.In view of this,this paper attempts to examine the influence of board interlocks relationship on the real earnings management convergence effects.Board members establish linkage among companies by simultaneously serving as directors in two or more companies,and this linkage serves as an information delivery channel that provides the potential for earnings management manipulation skills and experience to be communicated among interlocking companies,leading to convergence of the real earnings management among interlocking companies.Most of the existing researches focus on the influence of interlocking directors’ personal characteristics on the degree of real earnings management convergence.However,scholars neglect the external governance environmental factors that may affect the real earnings management convergence among interlocking firms.The external governance environment constitutes the basis of the firms’ survival and development.Different external governance environments will exert different incentive and constraint functions for the enterprise activities.Based on the perspective of external governance environment,this paper tests the effect of three external governance environmental factors such as marketization degree,government intervention level and law environment on earnings convergence degree,enriches the research literature that examines the board interlocks consequences from a macro perspective.This thesis takes the "company pair" which has board interlocking relationship from 2007 to 2015 as the research object and randomly designates one of the "company pairs" as the information sending company and the other one as the information receiving company.At the same time,it is assumed that earnings information is transferred from the information sending company to the information receiving company through the board interlocking channel and took by the information receiving company for one year.Then,this paper studies whether the earnings quality of the information sending company in year t will affect the earnings quality of the information receiving company in year t+1,and the role played by the external governance environment.The research results are mainly listed as followed.First of all,the real earnings management degree of the information receiving company in year t+1 is significantly positively correlated with the real earnings management degree of the information sending company in year t,that is,if two companies are connected by board interlocking relationship,the level of real earnings management between the two companies are both more convergent;secondly,we also find that this convergence effect only arises after board interlocks form,and disappears after interlocks dissolute;thirdly,when the external governance environment in the region where the company is located is bad,board interlocking relationship becomes more important and the real earning management convergence effect of the two companies is more significant.The innovation of this article lies in: Firstly,this paper finds that there is a significant convergence effect between the real earnings management of interlocked firms,and this conclusion makes a useful supplement to the research on the intersection of "network relationship and corporate finance";secondly,this paper discusses the external governance environmental factors that affect the earnings convergence degree from a macro perspective,helping different areas to treat board interlocking relationship based on their local governance conditions,which is the incremental contribution to existing studies.