Top Management Team Functional Diversity and Management Forecast Accuracy
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Prior literature documents that the diversity of top management team (TMT) functional experiences enhances firm performance through its effect on information processing and sharing between team members. In this study, I examine whether TMT functional diversity affects management forecast accuracy via the information aggregation and communication among top executives. If functional diversity among individuals allows top executives to better process and share information, a greater degree of functional diversity should lead to more accurate management forecasts. TMT functional diversity can take two forms. The first, between-member functional diversity, refers to the heterogeneity in the primary functional domains of each TMT member, and the second, within-member functional diversity, refers to the average intrapersonal breadth of functional experiences of each TMT. I find that both types are positively associated with management forecast accuracy. In cross-sectional analyses, I find that the effect of TMT functional diversity is more important for firms with greater uncertainty and complexity and for firms that are led by CEOs and CFOs who are narrow functional specialists. Collectively, the results suggest that TMT functional diversity plays an important role in management disclosure, thereby shedding light on how the knowledge composition of top management influences the aggregation and communication of financial information.