Feng Ge etal

Feng Ge etal - Why Do CFOs Become Involved in Material...

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Why Do CFOs Become Involved in Material Accounting Manipulations? * Mei Feng Katz Graduate School of Business University of Pittsburgh Pittsburgh, PA 15260 [email protected] Weili Ge Michael G. Foster School of Business University of Washington Mackenzie Hall, Box 353200 Seattle, WA 98195 [email protected] Shuqing Luo Katz Graduate School of Business University of Pittsburgh Pittsburgh, PA 15260 [email protected] Terry Shevlin Michael G. Foster School of Business University of Washington Mackenzie Hall, Box 353200 Seattle, WA 98195 [email protected] This version: May 12, 2010 * This paper was the 2008-2009 recipient of the Glen McLaughlin Prize for Research in Accounting Ethics from the School of Accounting, University of Oklahoma. We appreciate the comments of the workshop participants at University of Alberta, Concordia University, University of Missouri at Columbia, University of Oklahoma, University of Pittsburgh, University of Washington, Washington University in St. Louis, and the conference participants at the 2008 UBCOW Conference, 2008 Annual Conference on Financial Economics and Accounting, 2009 Mid-year FARs Conference and the 2009 AAA annual meeting. We thank Helen Adams, Robert Bowen, Dave Burgstahler, Shuping Chen, Harry Evans, David Farber, Jere Francis, Karim Jamal, Dawn Matsumoto, Sarah McVay, Donald Moser, Nandu Nagarajan, Christine Petrovits, Shivaram Rajgopal, and Mark Soliman for their comments. We thank Bradley Blaylock, Io-Ieong Chio, Patrick Martin, and Siwei Wang for their research assistance. Ge would like to thank the Foster CFO Forum Research Award and Shevlin the Paul Pigott/Paccar Professorship for financial support.
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Why Do CFOs Become Involved in Material Accounting Manipulations? Abstract This paper examines why CFOs become involved in material accounting manipulations. We find that while CFOs bear substantial legal costs when involved in accounting manipulations, these CFOs have similar equity incentives to the CFOs of matched non-manipulation firms. In contrast, CEOs of manipulation firms have higher equity incentives and more power than CEOs of matched firms. Taken together, our findings are consistent with the explanation that CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives. AAER content analysis reinforces this conclusion. Keywords: earnings quality, accounting manipulation, CFO turnover, CEO power, incentive compensation JEL Classifications: G34, G38, M41, M43, K22
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1 1. Introduction Recent corporate accounting scandals have led to significant losses for investors, triggered a series of corporate governance reforms and legislative changes, and prompted efforts to identify the underlying causes of these scandals. Prior research has focused on the incentives of CEOs or the executive team as a whole to manipulate accounting earnings (e.g., Burns and Kedia, 2006; Bergstresser and Philippon, 2006). However, there is little research on the
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This note was uploaded on 02/26/2012 for the course ECON 150 taught by Professor Akerlof during the Spring '12 term at Syracuse.

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Feng Ge etal - Why Do CFOs Become Involved in Material...

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