CFO Promotion-Based Incentives and Earnings Management.

Abstract

This study examines whether CFO promotion-based incentives induce opportunistic reporting activities. We find that CFO promotion-based incentives, measured by the pay gap between the CEO and the CFO, are positively associated with accruals management and accounting misconduct in the pre-SOX period and the probability of meeting or beating analysts' forecasts in both pre-and post-SOX periods. Further analysis shows that CFO promotion-based incentives are negatively associated with real earnings management in both pre-and post-SOX periods. In addition, we find some evidence that the association between CFO promotion-based incentives and opportunistic reporting activities is stronger before CEO turnovers. We also document that CFOs engage in more opportunistic financial reporting when the pay gap between the CFO and other VPs is greater. Overall, our findings suggest that CFO promotion-based incentives may encourage CFOs to engage in opportunistic reporting activities but mitigate real earnings management.

Do CEOs influence CFOs’ equity incentives to manage earnings?

“…Ham et al (2017) study CEO and CFO signature size to measure narcissism and draw the conclusion that CFO narcissism rather than CEO narcissism is negatively associated with financial reporting quality. 6* Liu et al (2020) document that CFOs have promotion-based incentives to manage earnings. Jiang et al (2010) and Feng et al (2011) have examined the relative roles of CEOs and CFOs in firms' opportunistic reporting activities, and provided inconsistent findings.…”

Behavioural investigation of the impact of different types of CEOs on innovation in family firms: moderating role of ownership divergence between cash flow rights and voting rights

“…Firm Age Log of total assets at previous year end (Bozec & Di Vito, 2019). CEO Power CEO pay divided by the sum of the pay of top five senior executives (Liu et al, 2020) Family Firms Dummy variable equalling 1 if a firm is controlled by a family and 0 otherwise (Yun et al, 2020).…”