The Role of Board/Audit Committee Interlocks in Diffusion of Earnings Equality

In this paper, I show that board interlocked firms\u27 accounting practices are significantly correlated and more so for audit committee interlocked firms, a finding that is robust using various settings and designs. Associations arise one year after creation of new interlocks and disappear one year after dissolution of old interlocks, inconsistent with the ex-ante firm-director matching explanation. Associations remain similar using the 2SLS model, consistent with the contagious explanation, i.e., that information about accounting practices transfers between interlocked firms. I find evidence that bad accounting choices are more contagious than good accounting choices, supporting the idea that the bad drives out the good . Overall, I document preliminary evidence about the importance of the social context for accounting choices and recommend that future researchers consider social context factors to better understand firms\u27 accounting choices