A number of earlier studies suggest that earnings quality improves when females are in senior management because of gender differences in risk-taking and ethical attitude. We extend this literature by using gender socialization theory and agency theory to examine the earnings management behavior of female Chief Executive Officers (CEOs) conditional on their equity incentives. We show that female CEOs do not necessarily reduce earnings management. At lower levels of equity-based compensation, female CEOs manipulate earnings to a lesser degree than their male counterparts. However, at higher levels of equity-based compensation, female and male CEOs exhibit very similar earnings management behaviors. Thus, given high equity incentives, all CEOs – regardless of gender – undertake a greater degree of earnings management activities. Consequently, there is little evidence that the gender of a CEO mitigates the propensity to increase the value of equity-based compensation by manipulating earnings.

Introduction

The revelation of financial reporting improprieties and the successive conviction of top managers of well-known firms such as Enron, WorldCom (Fazrad, 2005), and Bernard L. Madoff Investment Securities (New York Times, 2009) have fueled ongoing research into corporate misconduct (Harris & Bromiley, 2007; Ndofor, Wesley, & Priem, 2015: Shawver & Clements, 2015). The scale and scope of these, and similar, accounting scandals motivated policymakers to consider more rigorous financial reporting regulations (O’Connor, Priem, Coombs, & Gilley, 2006; Zhang, Bartol, Smith, Pfarrer, & Khanin, 2008) and, in accord, Congress enacted the Sarbanes-Oxley Act (SOX). However, in response to the enhanced regulatory scrutiny imposed on financial reporting by this legislation, managers promptly shifted away from accounting manipulation of earnings to more real activities manipulation (see Cohen, Dey, & Lys, 2008; Cohen & Zarowin, 2010; Farooqi, Harris, & Ngo, 2014; Zang, 2012).