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University of Arkansas, Fayetteville ScholarWorks@UARK Theses and Dissertations 8-2014 The Effect of CEO IT Expertise on the Information Environment: Evidence from Management Earnings Forecasts Jacob Zachary Haislip University of Arkansas, Fayetteville Follow this and additional works at: http://scholarworks.uark.edu/etd Part of the Accounting Commons, and the Management Information Systems Commons Recommended Citation Haislip, Jacob Zachary, "The Effect of CEO IT Expertise on the Information Environment: Evidence from Management Earnings Forecasts" (2014). Theses and Dissertations. 2230. http://scholarworks.uark.edu/etd/2230 This Dissertation is brought to you for free and open access by ScholarWorks@UARK. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. The Effect of CEO IT Expertise on the Information Environment: Evidence from Management Earnings Forecasts The Effect of CEO IT Expertise on the Information Environment: Evidence from Management Earnings Forecasts A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business Administration By Jacob Z. Haislip Texas Tech University Bachelor of Arts in Accounting, 2008 Texas Tech University Master of Science in Accounting, 2008 August 2014 University of Arkansas This dissertation is approved for recommendation to the Graduate Council. _________________________________ Dr. Vernon J. Richardson Dissertation Director _________________________________ Dr. Gary F. Peters Committee Member _________________________________ Dr. Rajiv Sabherwal Committee Member ABSTRACT Firms depend on information technology to provide high quality internal information, but prior research suggests that IT is underutilized (Venkatesh and Bala 2008). Therefore, using a sample of firms with equivalent levels of technology in their information systems, I investigate whether firms that employ CEOs with IT expertise make forecasts that are more accurate. I argue that CEOs with IT expertise are more likely to encourage the utilization of IT in making earnings forecasts, thus increasing the accuracy of the forecasts. This argument is supported by prior research that suggests that people are more likely to utilize technology if they have more experience with IT (Venkatesh et al. 2012). This research suggests that executives with IT experience are more likely to utilize IT because they perceive it as easy to use. Overall, I find that CEOs with IT expertise make forecasts that are more accurate. In additional tests, I also find that CEOs with IT expertise do not manage earnings to maintain accuracy. Finally, I find that analysts are more likely to rely on information provided by CEOs with IT expertise. Additionally, analysts benefit from the high quality information provided by CEOs with IT expertise because analysts that revise their forecasts following a forecast issued by a CEO with IT expertise make forecasts that are more accurate. ACKNOWLEDGEMENTS I would like to thank my committee chair, Vernon Richardson, as well as my other committee members Gary Peters and Rajiv Sabherwal for their constant guidance and support throughout the course of my time at the University of Arkansas. I thank Linda Myers, James Myers, Cory Cassell, and workshop participants at the University of Arkansas, Washington State University, the University of Massachusetts-Lowell, and Binghamton University for providing helpful comments and suggestions. I am forever appreciative of my fellow PhD students, particularly Lauren Dreher, Stacey Kaden, and Tim Seidel, for supporting me through the PhD program. I am also grateful to Harold ‘Hoop’ Harper for helping me become the person that I am today. I thank my parents, Tommy and Shereata Haislip, for everything they have done for me throughout my life. DEDICATION To my son Atticus, you infuse excitement into every situation, I could not ask for a better best bud. To my daughter Hadley, you create joy in the lives of everyone you encounter, my life was forever improved when you were born. Finally, to my beautiful wife Angela, I would not be here without your love, encouragement, and support. You are my everything. TABLE OF CONTENTS 1. INTRODUCTION .........................................................................................................1 2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT .............................6 1. IT Acceptance and the Internal Information Environment ................................6 2. The Internal Information Environment and Management Forecasts ..............10 3. RESEARCH DESIGN .................................................................................................12 1. Sample Selection ..............................................................................................12 2. Model Specifications .......................................................................................15 4. RESULTS ....................................................................................................................18 1. Univariate Results ............................................................................................18 2. Multivariate Results .........................................................................................19 5. ADDITIONAL ANALYSIS ........................................................................................20 1. 2. 3. 4. 5. 6. 7. Other Forecasting Attributes ............................................................................20 Alternative Earning Management Explanation ................................................22 Analyst Earnings Forecast Revisions...............................................................24 Self-Selection Bias ...........................................................................................27 Quarterly Forecasts ..........................................................................................28 Presence of CIO ...............................................................................................30 IT Expertise, Management Forecast Accuracy, and Internal Controls ............31 6. CONCLUSION ............................................................................................................35 REFERENCES ............................................................................................................37 TABLES ......................................................................................................................44 APPENDIX: The Calculation of Just Beat and Just Beat with DAs............................85 I. INTRODUCTION Managers rely on their information systems to provide information for internal decisions and external financial reporting. Following Dorantes et al. (2013), I refer to this flow of information to the manager as the internal information environment. A high quality internal information environment is one in which managers can access an abundance of accurate information from a variety of business processes in a timely fashion. Extant literature finds that effective information technology (IT) is the foundation of a high quality internal information environment (Li et al. 2012; Dorantes et al. 2013). Recent surveys of corporate directors document that firms recognize the importance of IT. However, these directors also admit that the majority of their firms lack adequate IT expertise to utilize IT effectively (KPMG 2012; PwC 2012). Therefore, I examine whether firms that employ a Chief Executive Officer (CEO) with IT expertise maintain a higher quality internal information environment, as evidenced through management earnings forecast accuracy. Firms depend on IT for timely and accurate information for decision-making. For this reason, most publicly traded firms use some type of integrative IT, such as an enterprise system1, to capture accounting and non-accounting information flows (Leib 2002; Brazel and Dang 2008; Cullinan et al. 2010). Prior research finds that implementing new IT improves the internal information environment (Dorantes et al. 2013), as evidenced by more accurate earnings forecasts issued by managers (hereafter referred to as management forecasts). Further evidence suggests that firms experience operational benefits from IT (Dehning and Richardson 2002; 1 Enterprise systems are a general type of IT commonly used by firms. Firms use these systems to integrate and automate business processes. They are used to connect processes within one organization or across multiple organizations. Firms use these systems to produce information used in operational and financial reporting decisions (Hitt et al. 2002; Sia et al. 2002; Dorantes et al. 2013). 1 Dehning et al. 2003; Kobelsky et al. 2008); however, the literature also suggests that firms underutilize IT leading to poorer than expected outcomes (Venkatesh and Bala 2008). A stream of research investigates why people choose not to adopt and utilize new IT (Venkatesh 2000; Venkatesh et al. 2003). Extant research shows that a primary reason managers are reluctant to adopt and utilize new technology is a lack of experience with IT (Armstrong and Sambamurthy 1999; Venkatesh 2000; Bassellier et al. 2003; Venkatesh et al. 2003; Venkatesh et al. 2012). Based on the evidence from these prior studies, and given that most firms have implemented technology based information systems, CEOs with IT expertise should be more likely to encourage the adoption, implementation, and utilization of those systems (Armstrong and Sambamurthy 1999; Venkatesh 2000; Bassellier et al. 2003; Venkatesh et al. 2003; Venkatesh et al. 2012). Therefore IT experience among executives may be beneficial to firms seeking to improve their internal information environment, because IT utilization should improve information flows. Managers make earnings forecasts using both accounting and non-accounting information provided by the firm’s information systems. Therefore, the accuracy of management forecasts are an external signal of the quality of the internal information environment. According to disclosure theory, when managers have access to better internal information they will make voluntary disclosures, such as earnings forecasts, to reduce agency costs and to signal their abilities (Trueman 1986; Verrecchia 1990). However, since managers face consequences for making poor quality forecasts they may choose to make less specific or fewer forecasts if their firm has a low quality internal information environment (Graham et al. 2005; Feng et al. 2009). Given their willingness to utilize IT, CEOs with IT expertise should be able to produce an internal information environment that allows them to make higher quality earnings forecasts. 2 I examine whether CEOs with IT expertise foster stronger internal information environments as evidenced by management forecasts that are more accurate than those made by other CEOs. Using biographies for CEOs from S&P 1500 firms, I construct a measure of IT expertise similar to Li et al. (2007), Haislip et al. (2013), and Lim et al. (2013). I develop this measure using information from the CEOs’ work and educational backgrounds.2 I argue that CEOs develop an expertise with IT through experience working in IT related positions and/or training associated with a degree in an IT related field. This expertise should affect the CEOs strategic priorities regarding IT, and increase their willingness to utilize IT. I predict that their experience with IT fosters a culture in which the use of IT is encouraged, which will also improve the quality of the information environment and the accuracy of management forecasts. Despite the benefits of CEO IT expertise, obtaining such expertise is not costless. There are undoubtedly opportunity costs associated with gaining IT expertise. For example, a CEO that previously served as a Chief Information Officer (CIO) likely will not have the financial reporting expertise a CEO that served as a Chief Financial Officer has. Therefore, the CEO with IT expertise in this example would lack financial reporting expertise (Krishnan 2005; Krishnan and Visvanathan 2008). It is unclear whether the benefits from IT expertise outweigh the opportunity costs of lacking other skills; however, IT is a key factor in an effective internal information environment (Masli et al. 2010; Dorantes et al. 2013; Li et al. 2012) and therefore is potentially an area where IT expertise provides the greatest benefit. 2 A more thorough discussion of the sample selection process and development of the IT expertise measure appear in the research design section. 3