This paper investigates how and to what extent do Chief Financial Officers (CFOs) affect earnings management. We introduce an index that captures CFOs’ ability and incentives to influence firms’ accounting practices. We find a negative association between the CFO index and discretionary accruals, which suggests that firms with strong CFOs (i.e. higher values of CFO index) are less likely to engage in accrual earnings management. This relation is robust to the inclusion of firm-, CEO- and governance-level controls, including fixed effects and to various approaches used to address potential endogeneity. The negative effect of strong CFOs on accruals seems to persist even in firms where CEOs have higher equity incentives and more power to engage in opportunistic earnings management. This suggests that CFOs may play an important monitoring role in the governance process. We also demonstrate that when firms are financially constrained, strong CFOs may (strategically) use discretionary accruals to facilitate its financing activities, but not when they are more likely to have personal financial gains from doing so.



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Conditional Conservatism and the Limits to Earnings Management”, Universidad Carlos III de Madrid