CEO Experience and Financial Reporting Quality: Evidence from Management Forecasts

Internally-promoted CEOs should have a deep understanding of their firm’s products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally-promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of U.S. firms from the Su0026P 1,500 index from 2001 to 2011, we hand-collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm’s voluntary disclosure is of higher quality.