Management Faultlines and Management Forecasts

52 Pages Posted: 20 May 2022 Last revised: 2 Nov 2022

See all articles by Xiaotao Kelvin Liu

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Mathijs Van Peteghem

Maastricht University - Department of Accounting and Information Management

Date Written: May 5, 2022

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

Suggested Citation

Liu, Xiaotao Kelvin and Van Peteghem, Mathijs, Management Faultlines and Management Forecasts (May 5, 2022). Contemporary Accounting Research, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 4109642, Available at SSRN: https://ssrn.com/abstract=4109642

Xiaotao Kelvin Liu (Contact Author)

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Mathijs Van Peteghem

Maastricht University - Department of Accounting and Information Management ( email )

Netherlands

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