Director social networks and demand for audit quality

This study investigates how director social networks function as informal governance mechanisms that influence firms’ demand for external audit quality. Based on a sample of listed and private companies in Finland over the period 2008 to 2016, the findings reveal a positive association between director social networks and the demand for audit quality. More specifically, we find that our measures of director social networks are positively and significantly associated with both audit fees and financial reporting quality. In addition, the findings show that this association is more pronounced in private firms than in listed firms. These results provide evidence that director networks function as an important corporate governance mechanism by enhancing the board’s monitoring capacity, which in turn leads to a greater demand for higher audit quality. Collectively, this study contributes to the growing body of literature on director social networks while offering new insights into the role of board
networks in private firms.