Accounting scandals and stigma by association via director interlocks

This dissertation examines the phenomenon of stigma by association between firms in the context of corporate accounting scandals. I draw from the social psychology literature to develop a theoretical framework that supports the notion of director interlocks as a channel in which associated firms may experience stigma. I argue that allegations of corporate accounting scandal generate attributional search by investors to determine the cause(s) of the alleged scandal. Attribution theory suggests that investors are likely to attribute responsibility to corporate boards for failing to detect and prevent these scandals. Investors’ perceptions of incompetent and/or unwilling directors in firms accused of accounting scandals may then spill over to directorship positions in associated firms, resulting in the stigmatization of these associated firms. The results strongly support the above arguments. I further adopted an information-based approach to argue that firms associated with stigmatized firms will experience different amounts of stigma, and some firms may experience no stigma at all. I applied social inference theories and agency theory to develop four categories of variables that may influence the amount of stigma experienced by associated firms. The results of the dissertation present strong evidence in support of most of the hypotheses. The characteristics of the interlocking director, the characteristics of the board, the strength of the director interlock, and the quality of corporate governance in an associated firm appear to influence the amount of stigma experienced by the associated firm. This dissertation highlights the possible (1) negative consequences of director interlocks, (2) understatement of the social costs of corporate accounting scandals, and (3) need for response strategies to mitigate the negative consequences of stigma by association.