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.