Friends in Low Places: Examining Board Interlock Formation after Financial Restatements
Management research has examined how potentially stigmatizing events may impact firms’ reputations, undermine the careers of their directors and executives, and force them to pursue actions to regain organizational standing. Prior work has not shown how such events may impact the ability of firms to build much-needed interlock ties with external organizations. In our study, we examine the impact of financial restatements as events that could lead to significant stigmatization or loss of organizational reputation. We examine the evolution of the network of board interlock ties among Fortune 500 firms during the 2002-2008 period. We use SIENA, a program for the statistical analysis of dynamics of social network tie formation that permits longitudinal analysis of tie formation while accounting for dynamic changes in behavior and characteristics of network nodes. We find that firms experiencing financial restatements are less likely to have their current directors receive invitations to join outside boards, they are more likely to avoid new ties with other restatement firms, they tend to draw on reciprocal ties and ties with higher status external firms, and they often maintain existing interlocks when their ties are currently embedded in transitive network structures involving multiple external firms. Our work contributes to the understanding of the processes of organizational tie formation under conditions of stigma or loss of reputation.