Do Director Networks Help Managers Plan and Forecast Better?

55 Pages Posted: 16 Aug 2016 Last revised: 7 Feb 2018

Date Written: February 7, 2018

Abstract

I examine whether directors' superior access to information and resources through their board network improves the quality of firms' planning and forecasting. Managers may benefit from well-connected directors as, even though managers have firm specific knowledge, they may have only limited insight into the decision-making processes of other firms. Employing a first-difference specification, I find that managers of firms with better connected directors can plan more accurately (i.e., realized profits are closer to managers' planned profits). Based on a final sample of 5,576 observations, for U.S.-firms spanning the years 2002 to 2013, find that a one standard deviation increase in board centrality increases earnings forecast accuracy by around 8 percent. In addition, more central firms make more accurate one-year ahead predictions of sales and capital expenditures. Overall, these firms have smaller positive and negative forecast errors. Cross-sectional analyses indicate that relatively more firms (i.e., firms with likely higher advisory needs), and firms with a high proportion of advisory directors benefit from networked directors. findings suggest that networked directors provide managers with valuable advice. This planning role of directors complements their more extensively studied role in preventing expropriation by managers.

Keywords: Management Forecasts, Board Centrality, Corporate Governance

JEL Classification: G3, M41, L14

Suggested Citation

Schabus, Mario, Do Director Networks Help Managers Plan and Forecast Better? (February 7, 2018). AAA 2017 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2824070 or http://dx.doi.org/10.2139/ssrn.2824070

Mario Schabus (Contact Author)

University of Melbourne ( email )

Victoria, 3010
Australia

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