Internal Connectedness and Accrual Quality: Evidence from Employee LinkedIn Connections

Abstract

SYNOPSIS We investigate the impact of employee connectedness on a firm’s accrual quality. Using data from the largest professional network, LinkedIn, we measure the degree to which employees are connected—which we label “internal connectedness”—and are therefore likely to interact and share information. We hypothesize and find that a firm’s internal connectedness increases its accrual quality and that the positive effect is stronger when external monitoring or internal formal monitoring is weaker or when accrual estimation is more difficult. That is, the effects of internal connectedness are stronger when greater benefits can be expected from enhanced informal internal information sharing. Our results provide insights for academics and practitioners in understanding the determinants of financial reporting quality and the crucial yet often neglected role of the internal information environment. Data Availability: Data are available from the sources cited in the text.