I examine whether directors' superior access to information through their board network improves the accuracy of firms' forecasting. Managers may benefit from well-connected directors (i.e., board centrality) as they may have limited insight into market developments or decision-making processes of other firms beyond knowledge specific to their firm. Employing a sample of U.S.-listed companies, I separately examine the effect of within-firm variation in direct and indirect board connections on management earnings forecast accuracy. The study contributes by showing that higher-degree connections can have an economically significant effect on the accuracy of management forecasts, regardless of firms' board interlocks. Further analyses point toward well-connected directors' ability to provide managers with valuable advice in a forecasting context, which complements directors' more extensively studied role in preventing managerial expropriation.
Firms trade off CFOs' fiduciary duties against their decision-making duties when designing CFO bonus plans. Decreasing bonus incentives tied to financial measures benefits CFOs' fiduciary responsibilities at the expense of motivating their decision-making duties. As prior research indicates that clawbacks increase personal misreporting costs through the loss of previously awarded compensation, we examine whether clawbacks allow firms to increase incentives in CFO bonus contracts. Based on a sample of U.S. firms between 2007 and 2013, we find that clawbacks are associated with greater CFO bonus incentives. We also find the increase in incentives to be more pronounced for CFOs relative to other executives. Our results are moderated by firms' susceptibility to misreporting. The relation between clawbacks and incentives is weaker when firms experienced internal control deficiencies, have larger abnormal accruals, when CFOs are more vulnerable to pressure from CEOs, and when audit committees have less financial expertise and prestige.
Firms trade off CFOs' fiduciary duties against their decision-making duties when designing CFO bonus plans. Decreasing bonus incentives tied to financial measures benefits CFOs' fiduciary responsibilities at the expense of motivating their decision-making duties. As prior research indicates that clawbacks increase personal misreporting costs through the loss of previously awarded compensation, we examine whether clawbacks allow firms to increase incentives in CFO bonus contracts. Based on a sample of U.S. firms between 2007 and 2013, we find that clawbacks are associated with greater CFO bonus incentives. We also find the increase in incentives to be more pronounced for CFOs relative to other executives. Our results are moderated by firms' susceptibility to misreporting. The relation between clawbacks and incentives is weaker when firms experienced internal control deficiencies, have larger abnormal accruals, when CFOs are more vulnerable to pressure from CEOs, and when audit committees have less financial expertise and prestige.
We examine the association between internal forecasting sophistication and end-of-the-year accounting misreporting. We draw on survey data from investment center managers of Dutch companies. Consistent with our hypothesis, results suggest that more sophisticated internal forecasting allows firms to reduce their costly accounting misreporting as these firms make more accurate projections and create contingency plans such that they can revise operational plans in a more appropriate and timely manner. Cross-sectional analyses reveal that the benefits in terms of greater forecasting capabilities can vary across conditions. We find that investments in internal forecasting are less effective in reducing the demand for misreporting when environmental volatility is high, when capital market pressure to meet expectations is comparably high, and when within-firm information asymmetry is high. The paper especially speaks to the planning role of budgeting and forecasting, as opposed to the relatively more extensively studied evaluation and incentive role.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.