CEO Internal Experience and Voluntary Disclosure Quality: Evidence from Management Forecasts

Journal of Business, Finance, and Accounting, forthcoming

59 Pages Posted: 30 Nov 2017 Last revised: 25 Nov 2018

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Jesus M. Salas

Lehigh University

Multiple version iconThere are 2 versions of this paper

Date Written: November 14, 2018

Abstract

Internally-promoted CEOs should have a deep understanding of their firm’s products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally-promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of U.S. firms from the S&P 1,500 index from 2001 to 2011, we hand-collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm’s voluntary disclosure is of higher quality.

Keywords: Voluntary Disclosure, CEO Turnover, CEO Inside Experience, Management Forecasts, Financial Reporting Quality

Suggested Citation

Brockman, Paul and Campbell, John L. and Lee, Hye Seung (Grace) and Salas, Jesus M., CEO Internal Experience and Voluntary Disclosure Quality: Evidence from Management Forecasts (November 14, 2018). Journal of Business, Finance, and Accounting, forthcoming. Available at SSRN: https://ssrn.com/abstract=3077698 or http://dx.doi.org/10.2139/ssrn.3077698

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Jesus M. Salas

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3238 (Phone)

HOME PAGE: http://www3.lehigh.edu/business/faculty/salas.asp

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