Social Connections and Accounting Conservatism

: This article investigates the effect of social connections between board of directors and top managers (CEOs/CFOs) on accounting conservatism. I posit that if board members are socially close to top managers, and that social connections could weaken board independence, and allow that managers are likely to delay recognition of losses and generally use less conservative accounting. Using measures of both conditional and unconditional conservatism respectively, I predict a negative relation between CEO/CFO-board social connection and accounting conservatism. Furthermore, I examine whether the mandated independence requirements of Sarbanes-Oxley Act (SOX) help to mitigate this effect. I predict that the negative effect of the social connections can be alleviated in the post-SOX period in the face of increased regulatory scrutiny and legal liability. This study presents new insights into how manager-board through social connections undermines the intensity of board monitoring, and affects managerial accounting choices.

Project ID:PF10307-0523
External Project ID:MOST103-2410-H182-005