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

Udi Hoitash and Anahit Mkrtchyan

Journal of Accounting and Economics, 2022, vol. 73, issue 1

Abstract: 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.

Keywords: Board monitoring; Internal governance; Information asymmetry; Financial reporting manipulation; Social networks (search for similar items in EconPapers)
JEL-codes: G34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000513

DOI: 10.1016/j.jacceco.2021.101436

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