Financial fraud contagion through board interlocks: the contingency of status

The purpose of this paper is to explore the implications of the relative status between two interlocking firms for financial fraud or non-fraud contagion through interlock ties.

This study uses a sample of publicly listed firms in China over a ten-year period from 2005 to 2014. Data are collected from the China Stock Market and Accounting Research Database.

This study finds that non-fraud behaviors of lower-status partners inhibit fraud behaviors of the focal firm, whereas their fraud behaviors have no effect on the focal firm. In contrast, fraud behaviors of higher-status partners facilitate fraud behaviors of the focal firm, whereas their non-fraud behaviors have no effect on the focal firm.

This study provides new insights to the misconduct contagion literature by considering firms’ status differential as an important factor that governs the contagion process of fraud or non-fraud behaviors in board interlocks. It combines role theory and the contagion literature by studying the influence of the match between the status-based role expectations and practices of interlocking firm on the focal firm’s decision to engage in the same type of practice.