Francois Brochet

Assistant Professor of Business Administration (Leave of Absence)

Unit: Accounting and Management

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(617) 495-9329

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Francois Brochet is an assistant professor of business administration in the Accounting and Management Unit. He teaches the Business Analysis and Valuation Using Financial Statements course in the MBA elective curriculum and teaches in the Executive Education program Strategic Financial Analysis for Business Valuation. Professor Brochet’s primary research areas are insider trading, corporate governance, and the effect of top executives on firm policies, all of which contribute to the understanding of information dissemination in capital markets. His research has been published in The Accounting Review and the Journal of Accounting Research. Professor Brochet earned his Ph.D. in accounting at the Stern School of Business, New York University. He also holds an M.S. in management, with a concentration in finance, from the HEC School of Management (France). Before his doctoral studies, Professor Brochet was a mergers and acquisitions analyst at LCF Rothschild in Paris.

    Publications

    Journal Articles

    1. Do Analysts Follow Managers Who Switch Companies? An Analysis of Relationships in the Capital Markets

      We examine the importance of professional relationships developed between analysts and managers by investigating analyst coverage decisions in the context of CEO and CFO moves between publicly listed firms. We find that top executive moves from an origin firm to a destination firm trigger analysts following the origin firm to initiate coverage of the destination firm in 10% of our sample, which is significantly higher than in a matched sample. Analyst-manager "co-migration" is significantly stronger when both firms are within the same industry. Analysts who move with managers to the destination firm exhibit more intense and accurate coverage of the origin firm than they do in other firms and compared to other analysts covering the origin firm. The advantage no longer holds after the executive's departure, and most of the analysts' advantage does not carry over to the destination firm. However, the analysts do increase the overall market capitalization of firms in their coverage portfolio. Our results hold after Regulation Fair Disclosure, suggesting that these relationships are not based on selective disclosure. Overall, the evidence shows both the importance and limitations of professional relations in capital markets.

      Keywords: management turnover; analyst coverage; capital market relationships; Capital Markets; Relationships;

      Citation:

      Brochet, Francois, Gregory S. Miller, and Suraj Srinivasan. "Do Analysts Follow Managers Who Switch Companies? An Analysis of Relationships in the Capital Markets." Accounting Review 89, no. 2 (March 2014).
    2. Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation

      We examine which independent directors are held accountable when investors sue firms for financial- and disclosure-related fraud. Investors can name independent directors as defendants in lawsuits, and they can vote against their re-election to express displeasure over the directors' ineffectiveness at monitoring managers. In a sample of securities class-action lawsuits from 1996 to 2010, about 11% of independent directors are named as defendants. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period. Named directors receive more negative recommendations from Institutional Shareholder Services (ISS), a proxy advisory firm, and significantly more negative votes from shareholders than directors in a benchmark sample. They are also more likely than other independent directors to leave sued firms. Overall, shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.

      Keywords: independent directors; Litigation Risk; class action lawsuits; director accountability; reputation; boards of directors; corporate governance; Debt Securities; Corporate Accountability; Lawsuits and Litigation;

      Citation:

      Brochet, Francois, and Suraj Srinivasan. "Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation." Journal of Financial Economics 111, no. 2 (February 2014): 430–449.
    3. Mandatory IFRS Adoption and Financial Statement Comparability

      This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. UK domestic standards are considered very similar to IFRS (Bae et al., 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders' ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases—used to proxy for private information—are reduced following IFRS adoption. Similar results are derived across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders' ability to exploit private information.

      Keywords: IFRS; comparability; private information; insider trading; Ethics; Standards; Financial Statements;

      Citation:

      Brochet, Francois, Alan Jagolinzer, and Edward J. Riedl. "Mandatory IFRS Adoption and Financial Statement Comparability." Contemporary Accounting Research (forthcoming).
    4. Short Termism: Don't Blame the Investors

      The article presents research on executives and corporation investor relations. A study is conducted of the language used by executives in conference calls discussing earnings with investors and financial analysts. A correlation was found between the use of language indicating a short-term focus by those executives and both their company's financial management practices and the company's stockholders, who were more likely to hold stock for short periods of time compared to other stocks.

      Keywords: Financial Management; Business Earnings; Managerial Roles; Investment; Agency Theory; Communication Strategy; Business and Shareholder Relations;

      Citation:

      Brochet, Francois, George Serafeim, and Maria Loumioti. "Short Termism: Don't Blame the Investors." Harvard Business Review 90, no. 6 (June 2012).
    5. The Predictive Value of Accruals and Consequences for Market Anomalies

      We revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions and market value of equity as a proxy for all future cash flows. We find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. In the cross-section, accruals' contribution is positively associated with proxies for quality of accruals and governance. Next, we investigate the implications of accruals' predictive value for accrual-based market anomalies. We find that portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. We also find that Sloan's (1996) accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals' contribution to future cash flow prediction is the highest, the accrual anomaly vanishes. Collectively, our results suggest that the predictive value of accruals and market participants' ability to process it are a significant driver of accrual-based anomalies.

      Keywords: Forecasting and Prediction; Investment Return; Value; Equity; Markets; Cash Flow; Information Management; Accrual Accounting; Earnings Management; Corporate Governance; Stocks;

      Citation:

      Brochet, Francois, Seunghan Nam, and Joshua Ronen. "The Predictive Value of Accruals and Consequences for Market Anomalies." Journal of Accounting, Auditing & Finance 27, no. 2 (April 2012).
    6. Manager-Specific Effects on Earnings Guidance: An Analysis of Top Executive Turnovers

      We investigate how managers contribute to the provision of earnings guidance by examining the association between top executive turnovers and guidance. Although firm and industry characteristics are important determinants of guidance, we conclude that CEOs participate in firm-level policy decisions, whereas CFOs are involved in the formation or discussion of guidance. Among firms that historically issued frequent guidance, breaks in guidance following CEO turnovers are relatively permanent and are potentially attributable to firm-initiated changes in guidance policy. Breaks following CFO turnovers, however, likely reflect uncertainty on the part of the newly appointed executive-they are concentrated in the two quarters following the turnover, are associated with the background of the newly appointed CFO, and extend to the relative precision of the guidance. Among firms that did not issue guidance historically, we find some evidence that newly appointed externally hired CEOs increase the likelihood of providing guidance.

      Keywords: Management Analysis, Tools, and Techniques; Management Teams; Policy; Decisions; Change; Risk and Uncertainty; Leadership;

      Citation:

      Brochet, Francois, Lucile Faurel, and Sarah McVay. "Manager-Specific Effects on Earnings Guidance: An Analysis of Top Executive Turnovers." Journal of Accounting Research 49, no. 5 (December 2011).
    7. Information Content of Insider Trades before and after the Sarbanes-Oxley Act

      This paper examines the information content of Form 4 filings under the more timely disclosure regime introduced by Section 403 of the Sarbanes-Oxley Act of 2002 (SOX). Abnormal returns and trading volumes around filings of insider stock purchases are significantly greater after SOX than before. Abnormal trading volumes around filings of insider sales are also greater post-SOX on average, but stock returns are not more negative. However, once controlling for pre-planned transactions, reporting lag, litigation risk, and news following insider trades, I also find a negative association between returns around filings of insider sales and SOX. Overall, the evidence suggests that the prompt public disclosures about insider transactions mandated by the new rule are relevant to the pricing of securities. The results are also consistent with SOX and regulatory actions reducing the incentives to sell ahead of privately known negative news.

      Keywords: Stocks; Corporate Disclosure; Governing Rules, Regulations, and Reforms; Government Legislation; Lawsuits and Litigation; Market Transactions; Volume; Sales;

      Citation:

      Brochet, Francois. "Information Content of Insider Trades before and after the Sarbanes-Oxley Act." Accounting Review 85, no. 2 (March 2010): 419–446.

    Working Papers

    1. Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation

      We examine which independent directors are held accountable when investors sue firms for financial and disclosure related fraud. Investors can name independent directors as defendants in lawsuits, and they can vote against their re-election to express displeasure over the directors' ineffectiveness at monitoring managers. In a sample of securities class-action lawsuits from 1996 to 2010, about 11% of independent directors are named as defendants. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period. Named directors receive more negative recommendations from Institutional Shareholder Services (ISS), a proxy advisory firm, and significantly more negative votes from shareholders than directors in a benchmark sample. They are also more likely than other independent directors to leave sued firms. Overall, shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.

      Keywords: Debt Securities; Lawsuits and Litigation; Legal Liability;

      Citation:

      Brochet, Francois, and Suraj Srinivasan. "Accountability of Independent Directors—Evidence from Firms Subject to Securities Litigation." Working Paper, 2013. (Harvard Business School Working Paper, No. 13-104, June 2013.)
    2. Capital Market Consequences of Linguistic Complexity in Conference Calls of Non-U.S. Firms

      We examine how linguistic complexity affects the capital market reaction to information disclosures. We define linguistic complexity as the use of non-plain English stemming from language barriers. Using transcripts from the English-language conference calls of non-U.S. firms, we find that linguistic complexity is positively associated with the language barriers in the firms' home country. We then show that conference calls that are more linguistically complex show lower price movement, lower trading volume, and more dispersion in analyst forecasts following the calls. Our results highlight that when disclosure takes the form of verbal communication, the complexity in the narrative impacts the market reaction to the disclosure.

      Keywords: complexity; Voluntary Disclosure; Capital market consequences; Non-plain English; Communication Intention and Meaning; Spoken Communication; Capital Markets; Complexity; Outcome or Result; Cross-Cultural and Cross-Border Issues;

      Citation:

      Brochet, Francois, Patricia L. Naranjo, and Gwen Yu. "Capital Market Consequences of Linguistic Complexity in Conference Calls of Non-U.S. Firms." Harvard Business School Working Paper, No. 13-033, October 2012. (Revised August 2013, March 2014.)
    3. Short-termism, Investor Clientele, and Corporate Performance

      Using conference call transcripts to measure the time horizon that senior executives emphasize when they communicate with investors, we develop a measure of corporate short-termism. We find that the measure of short-termism is associated with various proxies for earnings management, suggesting that our proxy partially captures opportunistic behavior. We also show that firms focusing more on the short-term have a more short-term oriented investor base, and fewer analysts issuing long-term forecasts, suggesting that corporate and capital market short-termism are related. Moreover, consistent with analytical models that emphasize the costly nature of short-termism, we find that short-term oriented firms exhibit lower future accounting and stock market performance and a higher implied cost of capital.

      Keywords: Short-termism; myopia; investor clientele; earnings management; Corporate performance; cost of capital; Business Ventures; Business and Stakeholder Relations; Stocks; Volatility; Cost of Capital; Resource Allocation; Risk and Uncertainty;

      Citation:

      Brochet, Francois, Maria Loumioti, and George Serafeim. "Short-termism, Investor Clientele, and Corporate Performance." Harvard Business School Working Paper, No. 12-072, February 2012. (Revised August 2012, February 2014.)
    4. Top Executive Background and Financial Reporting Choice

      We study the role of executive functional background in explaining management discretion in financial reporting. Taking goodwill impairment as our reporting setting, we focus on top executives (CEOs and CFOs) whose employment history includes experience in investment banking, private equity, venture capital or management consulting, as we expect these executives to have unique human capital and reputation concerns with respect to acquisitions and valuation modeling related to fair-value reporting. On average, we document that CFOs with prior transaction experience impair goodwill more frequently and in smaller amounts than other executives. Further investigation suggests that CFOs with prior transaction experience report goodwill that is more value relevant. This is consistent with CFO valuation expertise helping impair goodwill in a more informative manner. In contrast, CEOs with prior transaction experience appear to be subject to agency conflicts that affect their propensity to impair goodwill. Overall, our results not only suggest that executive functional background is a significant explanatory factor of financial reporting discretion, but also that a better understanding of its effect relies upon analyses of specific settings and predictions grounded in upper echelons theory and agency theory.

      Keywords: Financial Reporting; Goodwill Accounting; Experience and Expertise; Decision Choices and Conditions; Managerial Roles; Agency Theory;

      Citation:

      Brochet, Francois, and Kyle Travis Welch. "Top Executive Background and Financial Reporting Choice." Harvard Business School Working Paper, No. 11-088, February 2011. (Revised November 2011.)

    Cases and Teaching Materials

    1. Apple Inc. and the iPhone 4 Antenna Issue

      Citation:

      Brochet, Francois, Krishna G. Palepu, and Lauren Barley. "Apple Inc. and the iPhone 4 Antenna Issue." Harvard Business School Case 113-088, January 2013.
    2. Apple Inc. and the iPhone 4 Antenna Issue

      Citation:

      Brochet, Francois, and Krishna G. Palepu. "Apple Inc. and the iPhone 4 Antenna Issue." Harvard Business School Teaching Note 114-018, July 2013.
    3. Investindustrial Exits Ducati

      Keywords: Accounting; Motorcycle Industry; Europe;

      Citation:

      Brochet, Francois. "Investindustrial Exits Ducati." Harvard Business School Teaching Note 113-147, June 2013.
    4. Recognizing Online Revenues

      Citation:

      Brochet, Francois. "Recognizing Online Revenues." Harvard Business School Case 113-087, April 2013.
    5. Investindustrial Exits Ducati

      In early 2012, Investindustrial, a European private equity group, publicly announced their intention to sell their 76.7% stake in Ducati Motor Holding S.p.A., an iconic Italian producer of sport performance motorcycles. The decision followed a six-year turnaround during which Ducati returned to profitability and significantly expanded its product line. Investindustrial's team had the following exit alternatives: 1) a trade sale to an automotive buyer; 2) a secondary buyout, partial or complete, by a financial investor; 3) a relisting in Hong Kong. Each option had its pros and cons, but all required a careful valuation of Ducati to maximize the investors' return on their flagship investment.

      Keywords: Cost vs Benefits; Private Equity; Valuation; Investment Return; Brands and Branding; Financial Services Industry; Motorcycle Industry; Hong Kong; Italy;

      Citation:

      Brochet, Francois, and Karol Misztal. "Investindustrial Exits Ducati." Harvard Business School Case 113-058, February 2013.
    6. Netflix: Valuing a New Business Model

      In autumn 2011, Netflix was working to right the ship after publicly stumbling through a price hike and strategic shift and then retreat. The company was changing its business model to focus on streaming video service rather than the DVDs by mail that had brought the company success and praise. One important wrinkle in this business model shift came in the accounting of streaming content. The case describes the rule, FAS 63, that Netflix used to account for streaming content and the implications for the future of the company that could be attributed to this accounting shift.

      Keywords: accounting; performance measurement; online business; asset recognition; Accounting; Performance Evaluation; Online Technology; Motion Pictures and Video Industry; United States; Canada; Latin America; West Indies;

      Citation:

      Brochet, Francois, Suraj Srinivasan, and Michael Norris. "Netflix: Valuing a New Business Model." Harvard Business School Case 113-018, August 2012. (Revised January 2013.)
    7. LinkedIn Corporation (TN)

      Citation:

      Brochet, Francois. "LinkedIn Corporation (TN)." Harvard Business School Teaching Note 112-080, February 2012.
    8. LinkedIn Corporation

      The case is set at the end of the first public trading day of LinkedIn, an online professional network company. It provides information on the company's business model, financial statements, competitive landscape, and IPO terms, to help the reader critically assess the company's market valuation. In the context of strong investor appetite for social media companies (chief among which, Facebook) and fears of a new bubble driven by lofty expectations, can the firm's fundamentals justify its market price?

      Keywords: Initial Public Offering; Growth and Development; Earnings Management; Risk Management; Valuation; SWOT Analysis; Emerging Markets; Business Model; Information Technology; Competitive Strategy; Web Services Industry;

      Citation:

      Brochet, Francois, and James Weber. "LinkedIn Corporation." Harvard Business School Case 112-006, October 2011. (Revised January 2012.)
    9. Accounting for the iPhone at Apple, Inc. (TN)

      Teaching Note for 111003.

      Keywords: Accounting; Revenue; Corporate Disclosure; Telecommunications Industry;

      Citation:

      Brochet, Francois, and Krishna G. Palepu. "Accounting for the iPhone at Apple, Inc. (TN)." Harvard Business School Teaching Note 111-094, April 2011.
    10. Google and Earnings Guidance

      The case explores Google's communication strategy with Wall Street analysts. In particular, the case focuses on Google's commitment to a no-guidance policy and provides an overview of guidance practice among major U.S. companies.

      Keywords: Business Earnings; Communication Strategy; Capital Markets; Corporate Disclosure; Corporate Governance; Business and Shareholder Relations; United States;

      Citation:

      Brochet, Francois, and David Kiron. "Google and Earnings Guidance." Harvard Business School Case 111-026, November 2010. (Revised April 2011.)
    11. Google and Earnings Guidance (TN)

      Teaching Note for 111026.

      Keywords: Communication Strategy; Policy; Web Services Industry; Information Technology Industry; United States;

      Citation:

      Brochet, Francois. "Google and Earnings Guidance (TN)." Harvard Business School Teaching Note 111-093, February 2011.
    12. Accounting for the iPhone at Apple Inc.

      Apple initially recognized revenue associated with its iPhone product using subscription accounting. However, in 2008, the company started providing non-GAAP supplemental numbers where substantially all of the revenue was recognized upfront. Market participants' reactions to the disclosure were mixed. Was Apple "right" in arguing that subscription accounting was inadequate for the iPhone?

      Keywords: Corporate Disclosure; Revenue Recognition; Standards; Technology Industry; United States;

      Citation:

      Brochet, Francois, Krishna G. Palepu, and Lauren Barley. "Accounting for the iPhone at Apple Inc." Harvard Business School Case 111-003, September 2010. (Revised February 2011.)
    13. Tokyo AFM

      This case was written as the financial accounting portion of the final exam for a first-year MBA course at Harvard Business School. The goal was to test students' ability to apply major concepts taught during the course to an industry which they had not covered, but which shared similarities in terms of economics with issues addressed in the curriculum. The company, Tokyo Auto Fire & Marine (hereafter Tokyo AFM), is a fictitious insurance company based in Japan. The new CEO is revisiting the accounting choices of his predecessors in light of changes in the economic environment of the firm. The case can also be taught as a review session.

      Keywords: Accounting; Decision Choices and Conditions; Economics; Insurance; Insurance Industry; Japan;

      Citation:

      Brochet, Francois. "Tokyo AFM." Harvard Business School Case 109-056, March 2009. (Revised October 2010.)
    14. Societe Generale (A): The Jerome Kerviel Affair

      This case illustrates the tension/balance that firms with complex and risky business models must consider in designing their internal controls. It describes the environment in which a derivatives trader engaged in massive directional positions on major European stocks and indexes without being detected for over a year. Although the case could be used to teach the basics of internal controls, it is likely to be more effective by eliciting a debate about how predictable the incident was, and whether or not there was anything fundamentally flawed about the company's choices in terms of strategy, control systems and culture. It also provides an opportunity to discuss the challenges of dealing jointly with a market-wide crisis (subprime) and a company-level crisis.

      Keywords: Risk Management; Problems and Challenges; Complexity; Cost Management; Balance and Stability; Business Model; Design; Stocks; Crisis Management; Financial Markets; Consulting Industry; Europe;

      Citation:

      Brochet, Francois. "Societe Generale (A): The Jerome Kerviel Affair." Harvard Business School Case 110-029, October 2009. (Revised April 2010.)
    15. Societe Generale (B): The Jerome Kerviel Affair

      This case illustrates the tension/balance that firms with complex and risky business models must consider in designing their internal controls. It describes the environment in which a derivatives trader engaged in massive directional positions on major European stocks and indexes without being detected for over a year. Although the case could be used to teach the basics of internal controls, it is likely to be more effective by eliciting a debate about how predictable the incident was, and whether or not there was anything fundamentally flawed about the company's choices in terms of strategy, control systems and culture. It also provides an opportunity to discuss the challenges of dealing jointly with a market-wide crisis (subprime) and a company-level crisis.

      Keywords: Risk Management; Governance Controls; Crisis Management; Financial Services Industry;

      Citation:

      Brochet, Francois. "Societe Generale (B): The Jerome Kerviel Affair." Harvard Business School Supplement 110-030, October 2009. (Revised April 2010.)
    16. Société Générale: The Kerviel Affair (TN) (A) and (B)

      Teaching Note for 110029 and 110030.

      Keywords: Consulting Industry; Europe;

      Citation:

      Brochet, Francois. "Société Générale: The Kerviel Affair (TN) (A) and (B)." Harvard Business School Teaching Note 110-075, April 2010.
    17. Securities Trading: Front-, Middle- and Back Office

      This note explains the basic structure of the trading floor in a typical financial institution and how the front, middle and back offices interact to ensure a functioning trading system.

      Keywords: Capital Markets; Financial Institutions; Financial Services Industry;

      Citation:

      Brochet, Francois, and Rakeen Mabud. "Securities Trading: Front-, Middle- and Back Office." Harvard Business School Background Note 110-070, April 2010.
    18. Tokyo AFM (TN)

      Teaching Note for [109056].

      Keywords: Accounting; Economics; Organizational Change and Adaptation; Revenue; Insurance Industry; Japan;

      Citation:

      Brochet, Francois. "Tokyo AFM (TN)." Harvard Business School Teaching Note 109-091, April 2009.

    Other Publications and Materials

    1. Top Executive Background and Corporate M&A: The Case of Former Investment Bankers

      We study the M&A activity of firms with top executives whose employment history includes experience in a Wall Street firm, especially those with investment banking background ("IB executives"). In terms of strategy, controlling for firm-level effects, we document that firms with IB executives (and directors) engage in more divestitures. We also find that the presence of an IB CFO—but not CEO—is associated with more acquisitions. Next, in terms of accounting choice, we find that IB executives are more likely to impair goodwill only when their reputation concerns are likely to be low. Finally, in terms of performance, we find that market reactions to transaction announcements vary with the presence of a former Wall Street executive primarily when (s)he is an alumnus of one of the advisors on the deal. Overall, our results suggest that the influence of Wall Street executives on their firm's M&A stems not only from their functional background but also from their reputation concerns and social networks.

      Keywords: Managerial Roles; Reputation; Investment Banking; Financial Reporting; Mergers and Acquisitions; Social and Collaborative Networks; Goodwill Accounting; Power and Influence; Banking Industry;

      Citation:

      Brochet, Francois, and Kyle Welch. "Top Executive Background and Corporate M&A: The Case of Former Investment Bankers." December 2010.

      Research Summary

    1. Current Research

      Information Dissemination in Capital Markets

       

      Seeking to bridge economic theory and the role of individuals, Professor Brochet researches the transmission of information in capital markets. He has investigated the effects of information dissemination in areas including insider trading, executive turnover, and goodwill impairment.

       

      Insider trading

      Professor Brochet has examined insider trading information before and after the 2002 passage of the Sarbanes-Oxley Act, and he wrote the first study to demonstrate that the timely disclosure of insider purchases triggers economically meaningful market reactions in the United States. He has found that the more stringent filing requirements mandated by Sarbanes-Oxley have made the filings of insider purchases much more informative. His work documents that insiders are less likely to sell shares immediately prior to negative stock returns and ahead of unfavorable earning news, suggesting that the act has decreased informed insider selling. He has also discovered, after controlling for confounding factors, that stock returns around such filings have become significantly more negative.

      Professor Brochet’s findings also have implications for financial disclosure because they indicate that insider trade disclosures are a sizable component of market participants’ information set.

       

      Executive turnover

      Professor Brochet has studied executive turnover in two contexts. Regarding earnings guidance, he has looked at both CEO turnover and little-studied CFO turnover and found different effects. The findings show that CEOs participate in firm-level policy decisions, and that breaks in guidance when they leave are essentially permanent, though endogenously driven by poor performance. On the other hand, turnovers among CFOs, who are involved in the implementation of guidance, result in less serious breaks that seem to reflect uncertainly on the part of the new CFO.

      Professor Brochet’s research on corporate executives and security analysts, conducted in collaboration with Professor Suraj Srinivasan of HBS, has documented that some analysts “follow” top executives who move to new firms, provided the firms meet economic criteria—such as industry affiliation and market capitalization—that fit into their coverage space. Prior to the executives’ moves, the analysts who follow them exhibit more intense and accurate coverage of the old firm, and meet with the executives more often than other analysts. The findings shed light on the importance of and limitations to relationships between managers and capital market participants in analysts’ coverage decisions.

       

      Executives and goodwill impairment

      In a study aimed at explaining the impact of the professional background of top executives on financial reporting choices, Professor Brochet has examined goodwill impairment, which is highly subject to managerial discretion. With a focus on the decision making of top executives with backgrounds in investment banking, management consulting, and private equity or venture capital, Professor Brochet has found that CFOs with prior experience in those fields are significantly more likely to impair goodwill in a timely and informative manner. In contrast, CEOs with prior transaction experience are more likely to impair goodwill when their career concerns are low, or when they are subject to stricter monitoring, suggesting that these executives are subject to their own opportunistic motives. Overall, the findings show that executive functional background affects reporting choices, and that the effect is best understood in the context of upper echelons and agency theories.