The Influence of Corporate Board Social Connections on Management Voluntary Financial Disclosures

We study how the pre-existing social network ties between the CEO and outside board members are associated with the firms’ voluntary financial disclosure practices, proxied by management earnings guidance. We construct social network ties by considering the social ties in addition to the statutory ties. After controlling firm and year fixed effects, we find a substantially strong, negative relation between the likelihood of management earnings forecasts and the extend of outside directors’ connection to the CEO. Moreover, firms with boards of fewer connections are less likely to issue precise forecasts, but the forecasts issued are more accurate, and less optimistically biased. Together, our empirical evidence suggests that the pre-existing social connections among outside directors are associated with lower financial disclosure quality, thereby implying that social network ties between the CEO and outside board members weaken monitoring effectiveness of the board. Very preliminary draft: please do not quote without permission. Comments welcome 1 Corresponding author. Address: Visiting Assistant Professor, Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Datong Plaza, 211 West Huaihai Road, Shanghai, P.R.China, 200030. Email Address: [email protected]