Do Director Networks Help Managers Forecast Better?
60 Pages Posted: 16 Aug 2016 Last revised: 16 Aug 2019
Date Written: March 20, 2019
I examine whether directors' superior access to information and resources through their board network improves the quality of firms' forecasting. Managers may benefit from well-connected directors (i.e., greater board centrality) as, even though managers have firm specific knowledge, they may have 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 forecast more accurately. Based on a final sample of 5,576 observations, of U.S.-firms spanning the years 2002 to 2013, I find that a one standard deviation increase in board centrality increases earnings forecast accuracy by 8 percent. More central firms have more accurate one-year ahead predictions of capital expenditures. These firms have smaller absolute positive and negative forecast errors. Cross-sectional analyses indicate that firms with higher advisory demands and firms with a high proportion of advisory directors benefit from well-connected directors. My findings suggest that well-connected directors provide managers with valuable advice, which complements directors' more extensively studied role in preventing managerial expropriation.
Keywords: Management Forecasts, Board Centrality, Corporate Governance
JEL Classification: G3, M41, L14
Suggested Citation: Suggested Citation