IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v52y2019i1d10.1007_s11156-018-0711-z.html
   My bibliography  Save this article

The influence of CEO and CFO power on accruals and real earnings management

Author

Listed:
  • Terry A. Baker

    (Wake Forest University)

  • Thomas J. Lopez

    (University of Alabama)

  • Austin L. Reitenga

    (University of Alabama)

  • George W. Ruch

    (University of Oklahoma)

Abstract

In this study, we examine the effect of CEO and CFO power on both accruals and real earnings management (AEM and REM, respectively), and the extent to which CEO and CFO power mitigate the effect of one another on AEM and REM. We further examine whether the passage of the Sarbanes-Oxley Act (SOX) altered these effects. In the pre-SOX period, we find that AEM (REM) is greater when the CEO (CFO) is powerful relative to the CFO (CEO). In the post-SOX period, however, we find that the effect of relative CEO power on AEM subsides, whereas the effect of relative CFO power on REM persists. Additionally, we find evidence to suggest that powerful CFOs inhibit the AEM preferences of powerful CEOs in both the pre- and post-SOX periods. Finally, we find evidence to suggest that powerful CEOs inhibit the REM preferences of powerful CEOs in the pre-SOX period, but not in the post-SOX period. Collectively, our results suggest that the power of the CEO relative to the CFO is an important factor in the both the type and magnitude of earnings management.

Suggested Citation

  • Terry A. Baker & Thomas J. Lopez & Austin L. Reitenga & George W. Ruch, 2019. "The influence of CEO and CFO power on accruals and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 325-345, January.
    • Handle: RePEc:kap:rqfnac:v:52:y:2019:i:1:d:10.1007_s11156-018-0711-z
    DOI: 10.1007/s11156-018-0711-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-018-0711-z
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-018-0711-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Feng, Mei & Ge, Weili & Luo, Shuqing & Shevlin, Terry, 2011. "Why do CFOs become involved in material accounting manipulations?," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 21-36.
    2. Grinstein, Yaniv & Hribar, Paul, 2004. "CEO compensation and incentives: Evidence from M&A bonuses," Journal of Financial Economics, Elsevier, vol. 73(1), pages 119-143, July.
    3. Cannella Jr., Albert A. & Fraser, Donald R. & Lee, D. Scott, 1995. "Firm failure and managerial labor markets Evidence from Texas banking," Journal of Financial Economics, Elsevier, vol. 38(2), pages 185-210, June.
    4. DeAngelo, Linda Elizabeth, 1988. "Managerial competition, information costs, and corporate governance : The use of accounting performance measures in proxy contests," Journal of Accounting and Economics, Elsevier, vol. 10(1), pages 3-36, January.
    5. Fee, C. Edward & Hadlock, Charles J., 2004. "Management turnover across the corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 3-38, February.
    6. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
    7. Yoonseok Zang, 2008. "Discretionary behavior with respect to the adoption of SFAS no. 142 and the behavior of security prices," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 7(1), pages 38-68, February.
    8. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    9. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    10. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    11. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June.
    12. Hazarika, Sonali & Karpoff, Jonathan M. & Nahata, Rajarishi, 2012. "Internal corporate governance, CEO turnover, and earnings management," Journal of Financial Economics, Elsevier, vol. 104(1), pages 44-69.
    13. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
    14. Farrell, Kathleen A. & Whidbee, David A., 2003. "Impact of firm performance expectations on CEO turnover and replacement decisions," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 165-196, December.
    15. Efendi, Jap & Srivastava, Anup & Swanson, Edward P., 2007. "Why do corporate managers misstate financial statements? The role of option compensation and other factors," Journal of Financial Economics, Elsevier, vol. 85(3), pages 667-708, September.
    16. (Xuefeng) Jiang, John & Petroni, Kathy R. & Yanyan Wang, Isabel, 2010. "CFOs and CEOs: Who have the most influence on earnings management?," Journal of Financial Economics, Elsevier, vol. 96(3), pages 513-526, June.
    17. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    18. Idalene F. Kesner & Dan R. Dalton, 1994. "Top Management Turnover And Ceo Succession: An Investigation Of The Effects Of Turnover On Performance," Journal of Management Studies, Wiley Blackwell, vol. 31(5), pages 701-713, September.
    19. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    20. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
    21. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
    22. Kevin Koh & Dawn A. Matsumoto & Shivaram Rajgopal, 2008. "Meeting or Beating Analyst Expectations in the Post†Scandals World: Changes in Stock Market Rewards and Managerial Actions," Contemporary Accounting Research, John Wiley & Sons, vol. 25(4), pages 1067-1098, December.
    23. Raffi Indjejikian & Michal Matějka, 2009. "CFO Fiduciary Responsibilities and Annual Bonus Incentives," Journal of Accounting Research, Wiley Blackwell, vol. 47(4), pages 1061-1093, September.
    24. Brickley, James A., 2003. "Empirical research on CEO turnover and firm-performance: a discussion," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 227-233, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lu Qiao & Emmanuel Adegbite & Tam Huy Nguyen, 2024. "CFO overconfidence and conditional accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 1-37, January.
    2. Leilei Gu & Jinyu Liu & Yuchao Peng, 2022. "Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 175(4), pages 773-797, February.
    3. Hassan Espahbodi & Reza Espahbodi & Kose John & Hua Christine Xin, 2022. "Earnings management in the short- and long-term post-regulation periods," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 217-244, January.
    4. Ooi Chee Keong & Shafi Mohamad & Syed Ehsanullah, 2019. "International financial reporting standards and real earnings management," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 9(10), pages 281-292, October.
    5. Theodora Bermpei & Antonios Nikolaos Kalyvas & Lorenzo Neri & Antonella Russo, 2022. "Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 795-845, February.
    6. Nguyen, Quang Khai, 2022. "Determinants of bank risk governance structure: A cross-country analysis," Research in International Business and Finance, Elsevier, vol. 60(C).
    7. Chii-Shyan Kuo & Jia-Jye Yu & Feng-Chen Chang, 2022. "Revenue recognition and channel stuffing in the Taiwanese semiconductor industry," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(3), pages 352-361, September.
    8. Alam, Nafis & Ramachandran, Jayalakshmy & Nahomy, Aisha Homy, 2020. "The impact of corporate governance and agency effect on earnings management – A test of the dual banking system," Research in International Business and Finance, Elsevier, vol. 54(C).
    9. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    10. Ahsan Habib & Dinithi Ranasinghe & Julia Yonghua Wu & Pallab Kumar Biswas & Fawad Ahmad, 2022. "Real earnings management: A review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4279-4344, December.
    11. Chowdhury, Hasibul & Hodgson, Allan & Pathan, Shams, 2020. "Do external labour market incentives constrain bad news hoarding? The CEO's industry tournament and crash risk reduction," Journal of Corporate Finance, Elsevier, vol. 65(C).
    12. Junqin Huang & Youliang Liao & Bin Lin & Lawrence Loh, 2022. "Supporter or Supervisor? The Role of Chief Financial Officers in Corporate Innovation," Sustainability, MDPI, vol. 14(15), pages 1-18, August.
    13. Sattar Khan & Yasir Kamal & Muhammad Abbas & Shahid Hussain, 2022. "Board of directors and earnings manipulation: evidence from regulatory change," Future Business Journal, Springer, vol. 8(1), pages 1-22, December.
    14. Songsheng Chen & Jun Guo & Qingqing Liu & Xiaoxiao Tong, 2021. "The impact of XBRL on real earnings management: unexpected consequences of the XBRL implementation in China," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 479-504, February.
    15. Cai, Yongbin & Li, Mengzhe, 2022. "CEO-CFO tenure consistency and audit fees," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    16. Qiao, Lu & Adegbite, Emmanuel & Nguyen, Tam Huy, 2022. "Chief financial officer overconfidence and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 84(C).
    17. Huai-Chun Lo & Shin-Rong Shiah-Hou, 2022. "The effect of CEO power on overinvestment," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 23-63, July.
    18. Yasean A. Tahat & Ahmed H. Ahmed & David Power, 2022. "Earnings quality and investment efficiency: the role of the institutional settings," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 1277-1306, April.
    19. Shrikant P. Jategaonkar & Linda M. Lovata & Xiaoxiao Song, 2023. "Growth opportunities and earnings management by cross-listed and U.S. firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 157-183, March.
    20. Veganzones, David & Séverin, Eric & Chlibi, Souhir, 2023. "Influence of earnings management on forecasting corporate failure," International Journal of Forecasting, Elsevier, vol. 39(1), pages 123-143.
    21. C. S. Agnes Cheng & Yuan Huang & Sun & Yumiao Yu, 2021. "Geographic location of audit committee chairs and accruals quality: evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1215-1246, November.
    22. Santanu Mitra & Hakjoon Song & Sang Mook Lee & Shin Hyoung Kwon, 2020. "CEO tenure and audit pricing," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 427-459, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. Shane S. Dikolli & John C. Heater & William J. Mayew & Mani Sethuraman, 2021. "Chief Financial Officer Co-option and Chief Executive Officer Compensation," Management Science, INFORMS, vol. 67(3), pages 1939-1955, March.
    3. Peng, Qiyuan & Yin, Sirui, 2021. "Does the executive labor market discipline? Labor market incentives and earnings management," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 62-86.
    4. Al Mamun, Md & Balachandran, Balasingham & Duong, Huu Nhan, 2020. "Powerful CEOs and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 62(C).
    5. Martin Nienhaus, 2022. "Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment," Review of Accounting Studies, Springer, vol. 27(4), pages 1276-1318, December.
    6. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    7. Abernethy, Margaret A. & Bouwens, Jan & Kroos, Peter, 2017. "Organization identity and earnings manipulation," Accounting, Organizations and Society, Elsevier, vol. 58(C), pages 1-14.
    8. Denton Collins & Gary Fleischman & Stacey Kaden & Juan Manuel Sanchez, 2018. "How Powerful CFOs Camouflage and Exploit Equity-Based Incentive Compensation," Journal of Business Ethics, Springer, vol. 153(2), pages 591-613, December.
    9. Chowdhury, Hasibul & Hodgson, Allan & Pathan, Shams, 2020. "Do external labour market incentives constrain bad news hoarding? The CEO's industry tournament and crash risk reduction," Journal of Corporate Finance, Elsevier, vol. 65(C).
    10. Özgür, Arslan-Ayaydin & Thewissen, James & Torsin, Wouter, 2021. "Earnings Management Methods and CEO Political Affiliation," LIDAM Discussion Papers LFIN 2021017, Université catholique de Louvain, Louvain Finance (LFIN).
    11. Caglio, Ariela & Dossi, Andrea & Van der Stede, Wim, 2018. "CFO role and CFO compensation: an empirical analysis of their implications," LSE Research Online Documents on Economics 88296, London School of Economics and Political Science, LSE Library.
    12. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    13. Khanna, Poonam & Khan, Sarfraz A. & Krasikova, Dina & Miller, Stewart R., 2021. "Repeated engagement in misconduct by executives involved with financial restatements," Organizational Behavior and Human Decision Processes, Elsevier, vol. 166(C), pages 194-203.
    14. Garel, Alexandre & Martin-Flores, Jose M. & Petit-Romec, Arthur & Scott, Ayesha, 2021. "Institutional investor distraction and earnings management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    15. Ferris, Stephen P. & Sainani, Sushil, 2021. "Do CFOs matter? Evidence from the M&A process," Journal of Corporate Finance, Elsevier, vol. 67(C).
    16. Duong, Lien & Evans, John, 2015. "CFO compensation: Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 425-443.
    17. Vo, Thi Thanh Nha & Canil, Jean Milva, 2019. "CEO pay disparity: Efficient contracting or managerial power?," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 168-190.
    18. Chen, Tai-Yuan & Zhang, Guochang & Zhou, Yi, 2018. "Enforceability of non-compete covenants, discretionary investments, and financial reporting practices: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 41-60.
    19. Hao, (Grace) Qing & Li, Keming, 2022. "Options trading and earnings management: Evidence from the penny pilot program," Journal of Corporate Finance, Elsevier, vol. 77(C).
    20. Fan, Yaoyao & Jiang, Yuxiang & John, Kose & Liu, Frank Hong, 2021. "From watchdog to watchman: Do independent directors monitor a CEO of their own age?," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 206-229.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:52:y:2019:i:1:d:10.1007_s11156-018-0711-z. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.