Do the Properties of Analyst Earnings Forecasts Improve When Firms Are Managed by Female CFOs?

By Hwang, Induck; Kim, Hyung Tae "" et al. | Quarterly Journal of Finance and Accounting, Spring 2017 | Go to article overview

Do the Properties of Analyst Earnings Forecasts Improve When Firms Are Managed by Female CFOs?


Hwang, Induck, Kim, Hyung Tae "", Pae, Sangshin "", Quarterly Journal of Finance and Accounting


Using 1,021 CFO transitions, we find that analyst earnings forecasts become more dispersed after male CFOs are changed to male CFOs, whereas such deterioration in forecast dispersion is much weaker following male-to-female CFO transition. The result suggests that female CFOs mitigate the impact of CFO transitions on analyst earnings forecasts. We also document more accurate and consistent analyst earnings forecasts for female-CFO-led companies compared to firms with male-CFO-led companies. Overall, our findings suggest that the quality of analyst earnings forecasts is better when firms are managed by female CFOs. This study provides empirical evidence of benefit from female executives in line with existing gender studies in accounting and finance literature. Rather than female executives' managerial behavior, this study examines how female CFOs affect the quality of analysts' forecasts and supports previous findings that female CFOs tend to report financial information with better quality and make more prudent corporate decisions.

Introduction

Women are extending the boundaries of their role in the business area. The number of female top executives in the U.S. has steadily increased; women hold 14.2% of the top five executives. Among major U.S. corporations in 2015, women accounted for 11.6% of CFOs and 4.6% of CEOs, compared to 3.0% and 0.5% in 1994, respectively. (1) Specifically, there are 58 female CFOs serving at Fortune 500 companies in 2015. Corresponding to the expanding role of women in executive positions, academic literature has paid more attention on how gender difference in management affects corporate decisions in various aspects (Krishnan and Parsons 2008; Barua, Davidson, Rama and Thiruvadi 2010; Francis, Hasan and Wu 2013; Huang and Kisgen 2013 and Kim and Chung 2014). Since the advancement of female executives was initiated by the request for the fairness and equality in social participation, it is an intriguing empirical question whether the outcome of increasing female representation in management is economically beneficial or not.

The purpose of this study is to examine the implication of female CFOs in terms of the properties of analyst earnings forecasts. We define analyst forecast properties as forecast error and forecast dispersion. Specifically, we examine whether analyst earnings forecasts become less erroneous and dispersed when a firm employs a female CFO.

There are two reasons why firms with female CFOs might exhibit superior analyst forecast properties. First, firms with female CFOs tend to provide financial information with better quality due to the superiority in communication skills and ethics of female CFOs over male CFOs. Kim and Chung (2014) document that annual reports supervised by female CFOs are more readable; the annual reports include less complicated words and more detailed numerical presentation. Female CFOs can also contribute to enhancing the quality of reported earnings by mitigating managerial opportunistic behavior, such as manipulation of earnings (Krishnan and Parsons 2008 and Barua et al. 2010). Second, firms with female CFOs are inclined to make less volatile and more credible accounting practices and financial decisions. Francis, Hasan, Park and Wu (2015) find that corporate financial reporting becomes more conservative after male-to-female CFO transition, and the relation between female CFO and conservative financial reporting is more pronounced or only exists when the firms have a higher risk, such as litigation risk, default risk or management turnover risk. Huang and Kisgen (2013) find that firms with female executives make more prudent investing/financing decisions (e.g., acquisitions and debt offerings), and investors regard the decisions made by female executives as more reliable. The results imply that female CFOs who are more risk-averse than male CFOs (Huang and Kisgen 2013) tend to reduce the volatility of firms' financial decision and thereby lower the volatility of income numbers. …

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