Directors from Related Industries and Management Forecast Properties: An International Study

• In Event: Board of Directors Issues

Abstract

Managers cite information uncertainty as a partial explanation for their reluctance to voluntarily issue forecasts. Using an international sample of firms, we investigate whether directors with experience in a firm’s customer or supply industry (directors from related industries (DRI)) reduce this information gap, and in turn, improve management forecast properties. The issue is timely as world-wide heightened concern over a variety of risks is putting a premium on DRIs. We find that firms with DRIs are more likely to issue forecasts. Moreover, if firms do issue forecasts, those firms with DRIs issue more frequent forecasts than those issued by other firms. We also find some evidence that firms issue more precise forecasts if they have DRIs. The positive effect of DRIs on forecast issuance and frequency is most pronounced for firms in high information uncertainty environments, as captured by low firm-level analysts’ following and low country-level stock market information production. Our results hold in both U.S. and non U.S. sample firms, even after controlling for numerous determinants of management forecast properties. Further, influential DRIs have a more positive effect on management forecast issuance and frequency. Finally, we provide evidence that the stock market recognizes the crucial role that DRIs play in management forecasting: absolute value of cumulative announcement return around each management forecast is greater for firms with DRIs. Overall, our results suggest that DRIs play an important beneficial, but understudied, role in corporate disclosures.

Authors

• Herita Akamah, University of Oklahoma

• Ervin L Black, The University of Oklahoma

• Dipankar Ghosh, University of Oklahoma