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Do Director Networks Matter for Financial Reporting Quality? Evidence from Audit Committee Connectedness and Restatements

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  • Thomas C. Omer

    (School of Accountancy, University of Nebraska–Lincoln, Lincoln, Nebraska 68588)

  • shelley@unl.edu

    (School of Accountancy, University of Nebraska–Lincoln, Lincoln, Nebraska 68588)

  • Frances M. Tice

    (Leeds School of Business, University of Colorado Boulder, Boulder, Colorado 80309)

Abstract

This study examines the effect of audit committee connectedness through director networks on financial reporting quality, specifically the misstatement of annual financial statements. Using network analysis, we examine multiple dimensions of connectedness and find that after controlling for operating performance and corporate governance characteristics, firms with well-connected audit committees are less likely to misstate annual financial statements. In addition, our study demonstrates that audit committee connectedness through director networks moderates the negative effect of board interlocks to misstating firms on financial reporting quality. We conduct several tests to address identification concerns and find similar results. Our findings suggest that firms with better-connected audit committees are less likely to adopt reporting practices that reduce financial reporting quality.

Suggested Citation

  • Thomas C. Omer & shelley@unl.edu & Frances M. Tice, 2020. "Do Director Networks Matter for Financial Reporting Quality? Evidence from Audit Committee Connectedness and Restatements," Management Science, INFORMS, vol. 66(8), pages 3361-3388, August.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:8:p:3361-3388
    DOI: 10.1287/mnsc.2019.3331
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