Board Interlocks and Earnings Quality

We show that board interlocked firms' accounting practices as reflected in earnings quality are significantly correlated, and more so for audit committee interlocks. We also show that these associations arise after interlock formation and cease after interlock dissolution, consistent with the notion that information about accounting practices transfers between interlocked firms. It has been said " the bad drives out the good " and notorious accounting regulations' violations suggest this may be a legitimate concern for accounting practice diffusion. While we find some evidence consistent with good accounting practices being transferred, improving some interlocked firm's accounting quality, we find more consistent and more significant evidence that bad accounting, like disease versus good health, is more contagious. Overall, we document preliminary evidence about the importance of the social context for financial accounting practices and recommend that future researchers consider both monitoring and social context factors simultaneously to better understand firms' financial accounting practices.