CFO Tenure, Accounting Expertise, and Earnings Management

• In Event: CEO/CFO Impact

Abstract

This paper examines the incentives of CFOs to manage earnings in their early stage of tenure. We hypothesize and find that (1) CFOs are more likely to undertake income-increasing earnings management through discretionary accruals in the early years of their tenure and (2) this relation is more pronounced in firms with non-accountant CFOs than in firms with accountant CFOs. This evidence suggests that CFOs engage in earnings management when they face high uncertainty about job security, but accountant CFOs are less likely to manage earnings aggressively due to their long-term reputation concerns. Moreover, when analyzing the early-year incentives of CEOs and CFOs jointly, we find significant evidence of earnings management in the early stage of CFO tenure but not for CEO tenure. The results suggest that the income-increasing earnings management in the early years of CEO tenure, documented by Ali and Zhang (2015), is attributable to the effect of an important omitted variable, the incentives of CFOs to manage earnings in their early years of service. Our evidence sheds light on how short-term career and long-term reputation concerns shape managerial incentives for earnings management.

Authors

• Li Gao, University of Massachusetts-Boston

• Jay Junghun Lee, University of Massachusetts-Boston

• Yong-chul Shin, University of Massachusetts Boston