Top Management Team Functional Diversity and Management Forecast Accuracy

Abstract

I examine whether TMT between-member and within-member functional diversity affect management earnings forecast accuracy. Between-member functional diversity refers to the heterogeneity of functional experts on a TMT and within-member functional diversity refers to the aggregate functional breadth of TMT members. I find that both types of functional diversity are positively associated with management forecast accuracy. Further cross-sectional analyses show that these positive associations are significant only when firms face greater information uncertainty, when TMTs are more decentralized, and when TMT members have longer joint team tenure. These findings are consistent with the information-processing perspective that TMT functional diversity can facilitate information processing and sharing and thus improve management forecast accuracy. This study contributes to the literature by shedding light on how TMT members with various functional backgrounds work together in shaping financial disclosure quality.

Keywords: top management team (TMT), functional diversity, management forecast accuracy