Management Faultlines and Management Forecasts

Abstract

We examine whether management faultlines (i.e., dissimilar groupings among executives) are related to management forecast processes and outcomes. Management faultlines are formed based on the simultaneous alignment of senior executives’ demographic characteristics (e.g., an MBA background, elite school education, gender, board experience, age, or tenure). We argue that management faultlines impede information sharing, create conflicts, and divert managerial attention away from common-goal tasks. We hypothesize and find that management faultlines are associated with lower management forecast quality. Furthermore, the faultline effect is more pronounced when forecasting difficulty (i.e., inter-analyst forecast dispersion or earnings volatility) is high. In contrast, the faultline effect is mitigated when a firm nurtures a supportive and diverse workplace (i.e., high workplace diversity score). In addition, we find that management forecast propensity and frequency are negatively associated with management faultlines. Overall, our findings suggest that management faultlines compromise management forecast processes and outcomes. In particular, since faultlines can arise as a company diversifies, boards should be aware of these unintended consequences and how they can be mitigated.

Keywords: management faultlines, demographic diversity, senior executives, management forecasts, forecast quality

JEL Classification: M4, M14