Management’s Personal Ideology and Financial Reporting Quality

• In Event: How Managers and Shareholders Affect Financial Reporting Quality

Abstract

We investigate the relation between executives’ personal ideologies and financial reporting quality. Similar to a recent finance study suggesting that firms’ business decisions are related to top managers’ personal political orientations (Hutton et al., 2013), we use Federal Elections Commission (FEC) data to develop a proxy for the personal ideologies of each firm’s executives. Using this proxy, we test for a relation with two metrics of financial reporting quality: discretionary accruals and financial statement restatements. We find that both the absolute value of discretionary accruals and the probability of restatement decrease in the degree to which firms’ executives have conservative ideologies. The discretionary accruals results are robust to controls for potential self-selection bias, but in the post-SOX period these results are mixed. The restatement results persist in the post-SOX period. We conclude that executives’ personal ideologies may have an impact on financial reporting quality. Our findings contribute to a growing literature demonstrating that business outcomes are partially explained by individual influences including executives’ personal views and priorities.

Authors

• Tianming Zhang, Florida State University

• Katherine Campbell, University of North Dakota

• Matthew Adam Notbohm, University of North Dakota

• Adam R Smedema, University of Northern Iowa