Management Accounting Section Midyear Meeting

CEO-CFO Language Style Matching and Earnings Quality

• In Event: Break/Research Exhibition 3: Interfirm Issues and Governance

Abstract

This study introduces language style matching (LSM) to measure CEO-CFO psychological homogeneity and investigates how this relationship-specific characteristic affects firms’ earnings quality. We find that higher LSM is associated with higher accrual earnings management, suggesting that the CEO-CFO psychological homogeneity impede the scrutiny and different views among decision makers (i.e., CEOs and CFOs) over financial reporting practices, resulting in lower earnings quality. Furthermore, since psychological homogeneity can originate from social interaction similarity, demographic similarity, and personality similarity, we employ a two-stage analysis to tease out which factor(s) dominates in our context. We find that our finding is mainly driven by the personality similarity between CEOs and CFOs. In addition, we document that the effect of CEO-CFO LSM on accrual earnings management is more pronounced for firms with (i) greater financial constraints, (ii) poorer information environment, and (iii) weaker corporate governance. Our results remain when we use executives’ conversations within management presentation or Q&A sections to re-estimate the LSM. Evidence exploiting the CFO-first-came subsample further rules out the alternative explanation that CEOs recruit CFOs with similar psychological traits.

Authors

• Ruirui Fang, Xi'an Jiaotong University

• Nan Hu, Xi'an Jiaotong University

• Rong Huang, Fudan University/Baruch College