AAA Spark Meeting of the Regions

Board Risk Committees: Implications for Earnings Predictability

• In Event: Capital, Governance, and the Public Interest

Abstract

In this study, we investigate earnings predictability as it relates to the presence of board risk committees. We also examine whether market intermediaries revise their forecasts following board risk committee formation. Using a sample of 2,447 financial firm-year observations from 2003 through 2013, we find evidence that suggests firms with board risk committees have greater earnings predictability which results in lower analyst forecast error and dispersion. We further find that market intermediaries revise earnings forecasts upward and respond more strongly to earnings surprises when firms form a board risk committee. Overall, our findings are consistent with the notion that market intermediaries believe the presence of board risk committees results in better planning and execution of operations, which leads to lower operating uncertainty and more predictable earnings. We believe our study should interest not only academics, but also regulators and legislators as the analysis and findings have specific public policy implications.

Authors

• Benjamin C. Anderson, San Jose State University

• Christopher Hines, Missouri State University