CFOs and CEOs Who have the most influence on earnings management.pdf

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CFOs and CEOs Who have the most influence on earnings management.pdf

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CFOs and CEOs Who have the most influence on earnings management

ARTICLE IN PRESSContents lists available at ScienceDirectJournal of Financial Economics Journal of Financial Economics 96 (2010) 513–5260304-40 doi:10.1 Cor E-mjournal homepage: /locate/jfecCFOs and CEOs: Who have the most influence on earnings management?John (Xuefeng) Jiang, Kathy R. Petroni , Isabel Yanyan Wang Eli Broad College of Business, Michigan State University, East Lansing, MI 48824, USAa r t i c l e i n f o Article history: Received 15 April 2008 Received in revised form 27 February 2009 Accepted 10 August 2009 Available online 12 February 2010 JEL classification: M41 M52 Keywords: Compensation Earnings management Equity incentives CFO5X/$ - see front matter 2010 Elsevier B.V. 016/j.jfineco.2010.02.007 responding author. ail address: petroni@ (K.R. Petrona b s t r a c t This study examines the association between chief financial officer (CFO) equity incentives and earnings management. Chief executive officer (CEO) equity incentives have been shown to be associated with accruals management and the likelihood of beating analyst forecasts (Bergstresser and Philippon, 2006; Cheng and Warfield, 2005). Because CFOs’ primary responsibility is financial reporting, CFO equity incentives should play a stronger role than those of the CEO in earnings management. We find that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO. Our evidence supports the Securities and Exchange Commission’s (SEC) new disclosure requirement on CFO compensation. 2010 Elsevier B.V. All rights reserved.1. Introduction This study investigates whether chief financial officer (CFO) equity incentives are associated with earnings management. Extant research has focused on how chief executive officer (CEO) equity incentives affect earnings management. For example, prior research finds that CEO equity incentives are associated with accruals manage- ment (Bergstresser and Philippon, 2006) and the like-