Does More Effective Director Monitoring Make Management Guidance More Credible?

53 Pages Posted: 10 Nov 2021

See all articles by Tyler Jensen

Tyler Jensen

Iowa State University - Ivy College of Business - Department of Finance

Marlene Plumlee

University of Utah - School of Accounting

Jared I. Wilson

Indiana University - Kelley School of Business

Date Written: November 9, 2021

Abstract

Evidence of the impact of governance on disclosure credibility is inconclusive. Based on a large, post-Regulation Fair Disclosure (Reg-FD) sample, we find that increased director monitoring – through increased director independence and director attention – is associated with more credible management guidance, as evidenced by stronger analyst reactions to the news in management guidance. We document additional cross-sectional differences in the monitoring/credibility link, consistent with monitoring being particularly impactful when the role of external verification is largest (good news forecasts, low analyst following). We are able to identify causal effects through exogenous shocks to monitoring associated with (1) director deaths, (2) mandated independence required by Sarbanes-Oxley (SOX), and (3) changes in director attention due to M&A activities that eliminate board positions at other firms. This finding does not appear to be due to a link between effective monitoring and more accurate guidance, as the stronger analyst reactions occur only when guidance is less accurate. Overall, our findings provide strong support for director monitoring influencing the perceived credibility of management forecasts, especially in settings where external validation is needed.

Keywords: Director monitoring, governance, management guidance, director independence, director attention, analyst forecasts

JEL Classification: M41, G34

Suggested Citation

Jensen, Tyler and Plumlee, Marlene A. and Wilson, Jared I., Does More Effective Director Monitoring Make Management Guidance More Credible? (November 9, 2021). Available at SSRN: https://ssrn.com/abstract=3960014 or http://dx.doi.org/10.2139/ssrn.3960014

Tyler Jensen (Contact Author)

Iowa State University - Ivy College of Business - Department of Finance ( email )

Ivy College of Business
3230 Gerdin Business Building
Ames, IA 50011-2063
United States

Marlene A. Plumlee

University of Utah - School of Accounting ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Jared I. Wilson

Indiana University - Kelley School of Business ( email )

Kelley School of Business
801 W. Michigan Street
Indianapolis, IN 46202
United States
317-278-4715 (Phone)

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
67
Abstract Views
440
rank
448,222
PlumX Metrics