Firm CFO Board Membership and Departures

Abstract

I investigate firm financial management when the CFO has greater authority by being on the board and the corresponding changes when the CFO position leaves the board. After the 2002 regulatory changes on board composition requirements, determinants of CFO board membership shift from being driven by firm financing needs to being driven by managerial transition and the local supply of outside directors. Shareholders react negatively to CFO board departure announcements, especially in the post-Sarbanes-Oxley period and when the firm is expected to have their CFO on the board. When the CFO is on the board, firms have lower cash holdings, exhibit faster adjustment toward their optimal capital structure following shocks and are less financially constrained. These measures of greater financial flexibility diminish when the CFO position leaves the board, particularly in cash management activities. In sum, board membership is an important CFO characteristic affecting firm financial management decisions.

Keywords: CFO; inside directors; financial expertise; financial policy; boards

JEL Classification: G30, G32, G34, G35