CFO Outside Directorships: What Happens to the Home Firm?

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 3: Corporate Governance

Abstract

While Chief Executive Officers (CEOs) have reduced the number of outside directorships they hold in recent years, demand for Chief Financial Officers (CFOs) on corporate boards has grown significantly. In this study, we examine whether concurrent outside directorships of CFOs can affect financial reporting quality at the CFO’s home firm. Outside directorships for the CFO could increase financial reporting quality by exposing the CFO to different practices and strategies, or they could decrease financial reporting quality by distracting the CFO with additional work. Using a pre-post analysis approach and misstatements as a proxy for financial reporting quality, we find that, on average, there is no difference between the likelihood of a misstatement in years before appointment of the CFO to outside board service and years after appointment of the CFO to outside board service. Upon further examination, we find that that the likelihood of a misstatement significantly decreases after appointment of the CFO to an outside board in the same industry group as the CFO’s home firm, but there is no change in quality when the outside board appointment is in a different industry. These results suggest that CFOs can potentially benefit from outside board service when it is more relevant to their home firm. Our results should be of interest to audit firms and board members considering the implications of outside board service for CFOs.

Authors

• Lauren Cunningham, University of Tennessee-Knoxville

• Justin Cole Short, University of Tennessee-Knoxville