Advisory Board and Earnings Persistence

42 Pages Posted: 4 Oct 2014 Last revised: 7 Apr 2015

See all articles by Pei Hui Hsu

Pei Hui Hsu

California State University, East Bay - School of Business & Economics

Xuesong Hu

University of Oregon - Department of Accounting

Date Written: September 1, 2014

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

Suggested Citation

Hsu, Pei Hui and Hu, Xuesong, Advisory Board and Earnings Persistence (September 1, 2014). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2504723 or http://dx.doi.org/10.2139/ssrn.2504723

Pei Hui Hsu (Contact Author)

California State University, East Bay - School of Business & Economics ( email )

25800 Carlos Bee Boulevard
Hayward, CA CALIFORNIA 94542
United States

Xuesong Hu

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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