Audit committees’ social capital and financial reporting quality

Abstract

We draw on social capital theory to examine the relationship between audit committee (AC) members’ social capital and financial reporting quality. Using US data for the period 2001–2010, our results suggest that non-AC directors’ social capital does not appear to be relevant to financial reporting quality. As far as AC members are concerned, our findings show a negative relationship between their social capital and financial reporting quality, suggesting a ‘dark side’ to social capital. Specifically, we find that sitting in multiple ACs (centrality) has a negative impact on reporting quality only for those AC members designated as financial experts. When other proxies for social capital are considered (connectedness, brokerage position and strong ties), our results show that the quality of financial reporting significantly decreases with the social capital of non-financial experts sitting in the AC. We contribute to prior research by: (i) relying on social capital theory, which is widely neglected in accounting research, (ii) using multiple metrics to capture the complex dimensions of social capital, and (iii) discriminating between the effects of financial and non-financial experts’ social capital on reporting quality. Our results suggest policy-makers might wish to limit financial experts’ multiple directorships as well as assess the actual contribution of non-financial experts to AC effectiveness.