Do Director Networks Help Managers Plan Better?

• In Event: Corporate Directors

Abstract

I examine whether directors' superior access to information and resources through their board network improves the quality of firms' planning. Managers may benefit from well-connected directors as, even though managers have firm specific knowledge, they may have only limited insight into the decision-making processes of other firms. Employing a first-difference specification, I find that managers of firms with better connected directors can plan more accurately, i.e., realized profits are closer to managers' planned profits. Based on a final sample of 5,384 observations, for U.S.-firms spanning the years 2002 to 2013, I find that a one standard deviation increase in board network centrality increases earnings forecast accuracy by 14-18%. In addition, more central firms make more accurate one-year ahead predictions of sales and capital expenditures. Cross-sectional analyses indicate that relatively less experienced CEOs/CFOs, as well as managers of more complex firms benefit from networked directors. The findings suggest that directors serve as a conduit for transmission of information and resources, which enables them to provide managers with valuable advice, ultimately leading to higher-quality management forecasts. This advisory role of directors complements the more extensively studied monitoring role.

Author

• Mario Schabus, University of Melbourne