Joint Meeting of the Mid-Atlantic and Northeast Regions

Executive Youth and Conditional Conservatism

• In Event: Career Concern and Managerial Incentives

Abstract

Purpose – This study examines the relation between executive youth and conditional conservatism. Specifically, the study tests the joint hypothesis that career concerns are higher in the post-Sarbanes-Oxley (SOX) environment, which motivates young executives to report more conservatively.

Design/Methodology/Approach – For analyses, the study relies on the Basu’s (1997) measure of conditional conservatism as the proxy for conditional conservatism. Executive youth is defined as any Chief Executive Officer (CEO) younger than 50 years old, based on the CEO AGE variable from Execucomp.

Findings –The results suggest that young CEOs are less conservative pre-SOX and more conservative post-SOX, consistent with greater career/reputational concerns post-Sarbanes Oxley. Furthermore, the findings are stronger for young CEOs who do not hold the position of chair of the board, and thus who have greater career concerns. The inferences are robust to the inclusion of control variables and to controlling for potential endogeneity associated with the appointment of younger executives.

Research limitations/Implications – Collectively, the results provide evidence on the important role executives’ career concerns play in the production of accounting reports. Potential limitation of the study include the possibility that executive youth is not really captured well by the less than 50 years old cutoff. To alleviate this concern, various other measures of CEO youth were examined, and the main inferences remain.

Practical implications – The findings provide empirical evidence on the important role executives’ career concerns play in the production of accounting reports, particularly in the post-Sarbanes Oxley environment.

Originality/value – Prior theoretical research has provided competing theories and mixed evidence on the effect of executive youth and risk-taking. On one hand, there is a view that younger executives take more risks to signal greater ability. On the other hand, there is the notion that career and reputational concerns motivate younger executives to be more risk-averse. While empirical evidence has been provided for the executive youth and risk-taking view, there has been limited empirical evidence in support of the career concern view. This study fills this gap by reporting that in the post-Sarbanes-Oxley era, young CEOs are more conservative. This increased level of conservatism is consistent with higher career and reputational concerns due to various SOX-related requirements such as financial reports certification by the CEO, to the greater penalties incurred by CEOs for financial misreporting, and to a tighter young CEO labor market.

Author

• Henri Akono, University of Maine - Orono