Impact of the Independent Directors' Social Network on Earnings Management Before and During the COVID-19 Period

Abstract

This study examines the impact of the independent directors' social network on earnings management before and during the COVID-19 pandemic. The COVID-19 pandemic increased uncertainty and pressure in the business environment, which led to intensified earnings management of listed companies worldwide. The research constructs centrality indexes of the independent director social network through the social network analysis method and conducts an empirical study on 1,167 A-share listed companies in China from 2009 to 2020. The relationship between independent directors' network centrality and accrual-based earnings management of companies is examined. Empirical results reveal that independent directors' network centrality is associated with higher accrued earnings management and undesirable corporate practices such as earnings management can be disseminated through directors' social networks. This research innovatively incorporates the research findings into the COVID-19 context, further indicating that independent directors' social network is associated with higher accrued earnings management during the COVID-19 period than before. This research will provide insights for regulators, specifically regulators in China, regarding the independent directors' composition and effectiveness.