CFO Inside Directors And Board Supervision: Theoretical And Empirical Research

Board management duality can significantly affect the role of the board, and has long been the focus of theoretical and practical studies. One of the most common ways of management board duality is to promote managers into the board, which has been gaining popularity in recent years. The board bears the dual responsibilities of strategic advisory and supervisory control, and earning quality directly reflects the efficiency of board’s control over management. CFO is the producer, discloser and communicator of financial information within an organization. Then can the promotion of CFO into the board improve earnings quality, so that the efficiency of board’s supervision is enhanced? From the perspective of earnings quality, this paper examines the influence that CFOs promotion has on board’s function of supervisory control.The Agency Theory predicts that CFOs promotion into the board will reduce the efficiency of board supervision over the management, at the same time, CFO gains more power within the company as an executive director. These combined make it easier and more convenient for CFOs to manipulate earnings, which will jeopardize earnings quality. However, taking its special informational role into account, CFOs as inside directors can help the board grasp more internal information, and makes the relationship between board directors and managers more combined. In this manner, the CFO receives more support from the board, which enhance both the supervisory role of the boards and the informational role of CFOs. Earnings quality will be increased. To conclude, the influence of CFOs promotion is an empirical question. This paper employs a diff-in-diff estimation based on propensity score matching to explore this matter, so that I can provide a more accurate and direct result.This paper finds that as a whole, the effect of CFOs promotion into the board on earnings quality is contingent. CFOs entering the board may not improve earnings quality. Further analysis reveals that as a member of CEO management team, CFOs as inside directors can provide more information to the board and help the board fulfill its supervisory role in circumstances where the CEO power is weak, and external governance environment is strong. This leads to better earnings quality. On the opposite, CFO Directors will help CEOs conceal information from the board, or manipulate earnings due to CEO’s pressure, which result in earnings quality being damaged. These results are consistent through several robust tests.This easy is organized into six parts, with the main contents of each listed as follows.The first part is introduction. This part introduces the background and significance of this paper. It also defines the research question and the framework under which this paper is developed. Besides, innovation and contributions of this paper are summarized here.The second part is literature review and theoretical basis. This part reviews existing literature regarding the relationship between board’s composition and its functions, and that between board’s roles and earnings quality, and CFOs’duty and earnings quality. In addition, the theoretical basis of this paper includes the Agency Theory, the Theory of friendly boards and the Upper Echelons Theory.The third part is hypotheses. Basing on the literatures and theories reviewed in the second part, this section develops the hypotheses to be examined in the main test and in further analysis.The fourth part is research design. This part puts forward the ways to investigate the problems defined, including models, variables and the sample selection procedures.The fifth part provides the empirical results, which contain descriptive statistics of main variables, correlation analysis, and the estimation results based on a PSM-DID approach. Further, this paper provides the result of several sub-sample analyses, i.e. different levels of internal CEO power and external governance environment. To secure the robustness of my results, this section also conducts several robust tests.The last part is conclusion, which analyses the result and presents conclusions. Some potential weaknesses further research opportunities are also provided.This paper also contains some shortcomings, which are mainly concerned with the measurement of earnings quality and that of board supervision. Future researches could extend CFO inside directors’s contribution to board supervision by exploring the effect of CFO inside directors on investors’reponsiveness to earnings and on managerial compensations.