The effect of social ties between the CEO and board of directors and fiscal council's members on earnings management

Abstract

PurposeSocial factors can shape economic decisions. Corporate governance (CG) studies and guidelines usually neglect that the chief executive officer (CEO) and board members may be socially tied. This study investigates the effects of social ties between the CEO and board members on earnings management (EM).Design/methodology/approachThe authors run a series of regressions using a sample of Brazilian companies listed on the Brazilian Stock Exchange [B]³ between 2011 and 2017 to assess the effect of the social ties between the CEO and board members on EM using a social ties index. The authors also employ five robustness tests to verify the consistency of results, including alternative proxies of EM and social ties and an estimation using fixed effects.FindingsAfter developing and computing a social ties index between the CEOs and members of the board of directors (BD) and the fiscal council (FC), the study’s findings indicate that a significant level of social ties between the CEO and BD has a negative impact on EM. However, for FC members, the authors found non-significant results.Originality/valueUnlike previous studies, the authors built a social tie index (STI) from five elements of social ties assessed in an environment with a two-tier board system. Results show that elements of social interactions and personal relationships can benefit the company, as a CEO's level of social ties with the BD reduces EM practices.