Director Network Centrality And Value Relevance Of Accounting Information

Social and financial networks are a focal component of for all intents and purposes every single economic moment.One critical network in corporate world is the director network shaped by shared board directorates.An important dimension to explore within director network literature is firm-level director network centrality-the extent of connectedness.The more connected a firm,the more central it is in the corporate network and have access to more information which can have positive consequences for such firms.This study investigate the financial reporting consequences of director networks Prior studies often proxy for connectedness using the number of board interlocks.To represent the multi-dimensional constrLuct of connectedness in the network,I use four standard measures of connectedness(or"centrality")from social network theory.These measures represents connectedness dimensions characterizing directors'relative locations and importance in the network.I measure financial reporting quality by value relevance of accounting numbers and fair value accounting numbers.To construct director network measures,data for companies' board of directors is collected from ISS database(formerly known as Riskmetrics).Firm specific information is used from Compustat.Data from two databases is merged us'ing CUSIP codes,ticker and financial year.A final dataset of 4,149 firm-year observations is used to run fixed effect regressions based on Ohlson model.Findings show that network centrality has adverse impact on value relevance of accounting information.Study supports negative consequences of centrality on financial reporting quality and show that malpractices or business reduce monitoring capacity of directors.Findings are robust to alternate specification of regressions.Study contributes to both director network literature and accounting quality literature by adding on important link between these phenomena.Using network centrality instead of multiple directorship as a measure of directors' connectedness study provides better understanding of the topic.Study has implications for investors,managers,directors,and regulators.