Advisory Board and Earnings Persistence

Abstract

We examine the relationship between the board of directors and earnings persistence. We define the advisory role of board members as providing strategic counsel to top management. We argue that strategic counseling provided by the board helps create and sustain growth, which in turn translates into more persistent earnings. We find that for firms whose boards are dedicated to advising, earnings are more persistent and the association between earnings and future cash flows is higher, compared to firms whose boards are not focused on advising. We further find that advising by boards increases the persistence of both the cash flows component and the accruals component of current earnings. In additional analysis, we fail to find a significant positive correlation between boards with intensive monitoring and more persistent earnings. Putting together, these results suggest that the relation between board structure and earnings persistence are more likely driven by the advisory role and less likely by the monitoring function of the board of directors.

Keywords: Board of directors; Earnings Persistence; Advisory Board