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Why do CFOs become involved in material accounting manipulations?

  • Feng, Mei
  • Ge, Weili
  • Luo, Shuqing
  • Shevlin, Terry
Registered author(s):

This paper examines why CFOs become involved in material accounting manipulations. We find that while CFOs bear substantial legal costs when involved in accounting manipulations, these CFOs have similar equity incentives to the CFOs of matched non-manipulation firms. In contrast, CEOs of manipulation firms have higher equity incentives and more power than CEOs of matched firms. Taken together, our findings are consistent with the explanation that CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives. AAER content analysis reinforces this conclusion.

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Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 51 (2011)
Issue (Month): 1-2 (February)
Pages: 21-36

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Handle: RePEc:eee:jaecon:v:51:y:2011:i:1-2:p:21-36
Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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  1. Renée B. Adams & Heitor Almeida & Daniel Ferreira, 2005. "Powerful CEOs and Their Impact on Corporate Performance," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1403-1432.
  2. RAFFI INDJEJIKIAN & MICHAL MATĚJKA, 2009. "CFO Fiduciary Responsibilities and Annual Bonus Incentives," Journal of Accounting Research, Wiley Blackwell, vol. 47(4), pages 1061-1093, 09.
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  5. 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.
  6. Daniel Bergstresser & Thomas Philippon, 2003. "CEO incentives and earnings management," Proceedings 862, Federal Reserve Bank of Chicago.
  7. John Core, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, 06.
  8. Merle Erickson & Michelle Hanlon & Edward L. Maydew, 2006. "Is There a Link between Executive Equity Incentives and Accounting Fraud?," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 113-143, 03.
  9. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  10. Shane A. Johnson & Harley E. Ryan & Yisong S. Tian, 2009. "Managerial Incentives and Corporate Fraud: The Sources of Incentives�Matter," Review of Finance, European Finance Association, vol. 13(1), pages 115-145.
  11. Christopher S. Armstrong & Alan D. Jagolinzer & David F. Larcker, 2010. "Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 225-271, 05.
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