Independent director interlocks: effects and boundary on the earnings persistence of the firm

Abstract

This article first analyses the impact of independent director interlocks on firms' earnings persistence in China, an emerging market from 2007 to 2017. Using the independent director network data and the unique internal control index, this article investigates the association between independent director interlocks and earnings persistence, and the roles of firms' outside director interlocks and firms' inside internal control playing in earnings persistence. Our results reveal a significant and positive association between independent director interlocks and earnings persistence, and in the context, there is a clear mediation effect of internal control in relationship of independent director interlocks and earnings persistence. Further analyses on the scope and stability of independent director interlocks effects show that independent director interlocks can both improve accrual earnings persistence and cash flow persistence. Meanwhile, the effect of independent director interlocks differentiates under the influence of firms' strategy, only playing a significant role in defensive ones. Moreover, we find that independent director interlocks can relieve the 'accrual anomalies' in the securities market. Our results are robust to the various measure of earnings persistence and alternative methodological techniques.

IFRS experience and earnings quality in the GCC region

“…This finding is consistent with prior studies suggesting that employing a higher proportion of independent directors is associated with higher earnings quality (e.g. Liao and Chen, 2021; Alves, 2014) because of the independent directors' monitoring role.…”

Does board interlock control high-tech firm performance? Evidence from ASEAN's Growth Triangle Countries

“…Outside directors who hold positions on board members and have no special or personal relationship with the company either as employees or former employees are called independent directors (Adams & Ferreira, 2009). Independent directors have an important role in supervising the board, exerting influence over the choice of company accounting policies and methods (Liao & Chen, 2020) and monitoring board activity, and controlling decision making by the board (Merendino & Melville, 2019). Independent interlocks play an important role in bridging the network consisting of interlocks of companies.…”

“…However, there is literature that claims that independent interlocks can reduce a company performance because independent interlocks networks can form small groups that have the opportunity to collude with each other to thwart shareholders' interests. Unlike the inside director, an independent director who has concurrent positions at several companies at the same time will fail to devote all his abilities to one company (Liao & Chen, 2020). Based on the stewardship theory, basically, an inside director is an individual who can be trusted and can be called a good steward who will work based on the interests of shareholders (Davis et al, 1997).…”

“…In addition, (Arioglu, 2020) stated that if the company wants to survive, it needs to overcome the existing uncertainties. Overcoming uncertainty can be done by practicing interlocking directorate, both general practice of interlocking directorate (Martin, Gözübüyük, & Becerra, 2013), woman interlock to see from the side of gender diversity (O'Hagan, 2017), and Independent interlock (Liao & Chen, 2020) to see if the independent director is doing the interlocking.…”

“…Most previous studies had conducted research on the board interlock phenomenon (Hernández-lara & Gonzales-bustos, 2019;Liao & Chen, 2020;Markoczy, Sun, & Zhu, 2020;O'Hagan, 2017;Zona, Gomez-Mejia, & Withers, 2015). The increasing number of studies on the influence of board interlocks on the company has become evidence of the increasing interest in understanding the unique characteristics inherent in interlock boards.…”