Does More Effective Director Monitoring Make Management Guidance More Credible?

Abstract

Evidence of the impact of governance on disclosure credibility is inconclusive. Based on a large, post-Regulation Fair Disclosure (Reg-FD) sample, we find that increased director monitoring – through increased director independence and director attention – is associated with more credible management guidance, as evidenced by stronger analyst reactions to the news in management guidance. We document additional cross-sectional differences in the monitoring/credibility link, consistent with monitoring being particularly impactful when the role of external verification is largest (good news forecasts, low analyst following). We are able to identify causal effects through exogenous shocks to monitoring associated with (1) director deaths, (2) mandated independence required by Sarbanes-Oxley (SOX), and (3) changes in director attention due to M&A activities that eliminate board positions at other firms. This finding does not appear to be due to a link between effective monitoring and more accurate guidance, as the stronger analyst reactions occur only when guidance is less accurate. Overall, our findings provide strong support for director monitoring influencing the perceived credibility of management forecasts, especially in settings where external validation is needed.