Earnings quality and board meeting frequency

Abstract

We propose that corporate directors are in greater need of soft information about the firm when the quality of hard accounting information is low. We further propose that board meetings constitute a key opportunity for corporate directors to gather soft information about the firm, and empirically investigate the relationship between financial reporting quality and the board's soft information gathering, as revealed by board meeting frequency. Consistent with expectations, we find that boards meet more frequently when accruals quality is low. We further find that the proportion of outside directors, insider ownership, and SOX regulation moderate this relationship. The evidence is reinforced by analysis of management earnings forecasts, financial restatements, and internal control weaknesses and is robust to several alternative earnings quality specifications. Additional empirical tests suggest that our results are incremental to the alternative explanation of increased meeting frequency to address problems in the reporting process per se. We conclude that corporate directors seek more frequent board meetings as an alternative information source to low earnings quality.