Internal governance and outside directors' connections to non-director executives

• 成果类型: Article
• 署名作者: Hoitash, Udi; Mkrtchyan, Anahit
• 署名单位: Northeastern University; University of Calgary
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2021.101436
• 发表日期: 2022
• 关键词: control material weaknesses; real earnings management; independent directors; corporate governance; industry expertise; Board connections; SMALL WORLD; networks; CEOS; irregularities

摘要

The monitoring effectiveness of outside directors is curtailed by information asymmetry between boards and management. Connections between outside directors and executives who do not serve on the board (internal ties) may help overcome this challenge by facilitating information sharing between the connected parties. Internal ties can also empower connected executives to withstand pressure from CEOs to take actions that might endanger their reputation in the long term. Alternatively, internal ties may entrench executives by insulating connected executives from adverse outcomes. Consistent with the former, we find that earnings restatements, class-action litigations, and real earnings management decrease when directors are connected with executives responsible for these areas. Connected boards also make better decisions related to CEO turnover, CEO succession and acquisitions. Overall, our results show that internal ties are associated with improved internal governance, thereby suggesting that boards may benefit from forging stronger relationships with non-director executives. 0 2021 Elsevier B.V. All rights reserved.