Financial Regulators on Boards: Evidence From Earnings Information Quality

ABSTRACT We find that directors with a financial regulatory background are associated with lower earnings quality. The influence of financial regulatory directors (FRDs) is more substantial for firms with higher proprietary costs and FRDs with greater expertise and experience. FRD firms do not have a greater likelihood of financial misconduct or meeting or beating analysts' forecasts. The stock market reacts more positively to FRD appointments than to the appointments of other directors. Our findings suggest that FRDs certify firm discipline, with lower earnings quality reflecting strategic choices rather than opportunistic manipulation, highlighting the impact of postemployment restrictions in financial regulatory agencies.