CFO Outside Directorships: What Happens to Financial Reporting Quality at the Home Firm?
52 Pages Posted: 18 Sep 2017 Last revised: 12 Dec 2018
Date Written: December 2018
The demand for chief financial officer (CFO) service on corporate boards has grown substantially in recent years, leading to questions about how these outside appointments might affect a CFO’s ability to fulfill her responsibilities at her home firm. Using financial statement misstatements and material weaknesses in internal control to proxy for financial reporting quality (FRQ), we examine whether CFO outside directorships affect FRQ at their home firms. Outside directorships could decrease FRQ because they place demands on a CFO’s limited time or could increase FRQ by exposing the CFO to different accounting practices and strategies. Contrary to concerns about CFOs being distracted from their primary duties, our results suggest that CFO outside board service is not detrimental to FRQ at the home firm, even in situations where outside board service demands a substantial amount of board member attention. Instead, we find that CFO outside board service is beneficial, on average, in that it leads to higher home firm FRQ. In additional analyses, we find that this on average benefit is related to learning opportunites which occur when CFOs join the outside firm’s audit committee, when CFOs lack accounting expertise, and when the quality of financial reporting at the outside firm is high. Our results should be of interest to regulators, investors, auditors, management, and board members considering the implications of CFO outside board service.
Keywords: Chief Financial Officers, Boards of Directors, Financial Reporting Quality, Misstatement, Material Weakness
JEL Classification: G34, M41
Suggested Citation: Suggested Citation