Does more effective director monitoring make management guidance more credible?

Abstract

Prior evidence of the impact of governance on disclosure credibility is inconclusive. In particular, prior studies are unable to document a significant association between board of director characteristics and analyst reactions to management guidance. By isolating exogenous variation in director monitoring in a large, post-Regulation Fair Disclosure (Reg-FD) sample, we find that increased monitoring is associated with stronger analyst reactions to news in management guidance. We also document cross-sectional differences, consistent with monitoring being particularly impactful when the role of external verification is most important (e.g., good news forecasts, low analyst following). We identify 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. Overall, our findings provide strong support for director monitoring influencing the perceived credibility of management guidance, especially in settings where external validation is needed.