CFOs’ Gender and Real Earnings Management

• In Event: Financial Accounting and Reporting 8

Abstract

Using accruals as a proxy for financial reporting quality, Peni and Vahamaa (2010) and Barua, Davidson, Rama, and Thiruvadi (2010) provide evidence that female Chief Financial Officers (CFOs) are more moral than male CFOs. Using 120,179 U.S. firm-years observations from 1997-2011, I re-examine this stereotyped relationship by empirically testing the association between gender of CFOs and Real Earnings Management (REM). Although the results suggest that female executives are, on average, 2% less likely to manipulate REM, empirical evidence shows that female CFOs are 5% more likely to manipulate individual REM through excessively reducing discretionary expenses. Interestingly, the results show a significant positive association between female CFOs and REM aggregate measures and this significant association is more pronounced pre Sarbanes-Oxley Act (2002) period and among high-performing firms. One possible explanation for these results is that female CFOs signal their managerial abilities by manipulating REM, which does not subject the firm to legal litigation and artificially inflates short-term cash flows and operating performance.

Author

• Dina F El-Mahdy, Morgan State University