Advisory Board and Earnings Persistence

Abstract

We examine the relationship between the board of directors and earnings persistence. We define the advisory role of board members as providing strategic counsel to top management. We argue that strategic counseling provided by the board helps create and sustain growth, which, in turn, translates into more persistent earnings. We find that for firms whose boards are dedicated to advising, earnings are more persistent and the association between earnings and future cash flows is higher, compared with firms whose boards are not focused on advising. We further find that advising by boards increases the persistence of both the cash flows component and the accruals component of current earnings. In additional analyses, we fail to find a consistently positive correlation between boards with intensive monitoring and more persistent earnings. Putting together, these results suggest that the relation between board structure and earnings persistence is more likely driven by the advisory role and less likely by the monitoring function of the board of directors.

Female directors and managerial opportunism: Monitoring versus advisory female directors

“…Drawing on a sample of US firms for the period 2007 to 2014, we provide new evidence that suggests that female directors appear to contribute more to the integrity of financial reporting when they hold monitoring roles. In contrast to the current argument that advisory directors, in general, are more able to sustain and improve earnings quality (Hsu & Hu, 2016), we could not find evidence to suggest that advisory female directors are significantly associated with lower managerial opportunism.…”

“…Corporate boards perform two main roles: (i) advising and (ii) monitoring corporate executives (Adams & Ferreira, 2007;Faleye, Hoitash, & Hoitash, 2011Hsu & Hu, 2016;Jensen, 1993). The central objective of this study, therefore, is to investigate which of these two major board of directors' roles (advisory versus monitoring) is best played by female directors within boardrooms in order to make a difference to shareholders.…”

“…However, female director quotas appear to have been arbitrarily set without being informed by reliable evidence relating to their potential impact on boardroom effectiveness and corporate performance (Ryan et al, 2016;Sojo, Wood, Wood, & Wheeler, 2016). With specific reference to gender-effective board roles, while, to date, it is clear within the literature that female directors are, on average, both better advisors and monitors of corporate executives on behalf of shareholders (Adams & Ferreira, 2004Hsu & Hu, 2016;Lara et al, 2017;Srinidhi et al, 2011;Zalata, Tauringana, & Tingbani, 2018), it is not theoretically or empirically clear as to which of the two major board rolesadvisory or monitoringis better suited for female directors.…”

Voluntary Disclosure, Earnings Response Coefficient and Earnings Persistence

“…Hohenfels (2016) Control variables that test the association of voluntary disclosure to earnings persistence in this study are company size (SIZE), debt level (LEV), sales growth (GWTH), negative profit (LOSS), cash flow volatility (VAK) and accrual value (ACC). Research by Lee & Yoon (2012); Hsu & Hu (2016) and Bolmiri et al (2016) control the size of the company and the level of debt in analyzing the association of independent variables to earnings persistence. There is a positive association between firm size on earnings persistence.…”

Firm life cycle and advisory directors

“…Evidence suggests that a set of firm-level variables determines the characteristics of advisory directors, for example, professional expertise and experience valuable for strategic decision-making, entrepreneurial background, CEO-level experience, advanced degrees and longer board tenures (Faleye et al, 2013). Evidence also suggests that boards with more advisory directors increase firm value (Coles et al, 2008; Faleye et al, 2013) and earnings persistence (Hsu and Hu, 2015). Although insightful, these studies take a static view of advisory boards in that they do not consider the variation in the intensity of board advice during different life cycle stages.…”