Abstract

One person serving as both CFO and board secretary is a unique institutional feature in China. Individuals in this senior executive role are responsible for not only the preparation of financial statements but also the coordination of information disclosure. We investigate the relation between a CFO serving as board secretary and financial statement comparability. We find that a CFO serving as board secretary improves the comparability of a firm’s financial statements in additional analysis. This positive effect is more significant when the CFO is female or middle-aged, or has a Bachelor’s degree or higher or a financial background. This paper enriches the theoretical research on CFO’s employment characteristics and the quality of financial reports, and provides reference value for improving the quality of financial reports.

Introduction

Information disclosure of listed companies is essentially a process of information transmission [1]. In the whole process, there are many factors that affect the effect of information transmission, such as the quality of the communication intermediary, the cognition of the receiver, the market environment, etc [2]. Among them, the performance of the information communicator (the discloser) has a direct and key role in the quality of information disclosure [3]. In China, the secretary of the board of directors (hereinafter referred to as “the secretary of the board of directors”), as the “spokesman”, plays an important role as the information disseminator in the process of information disclosure of listed companies [4]. As the starting point of the information dissemination process, the performance of his duties directly affects the quality of information disclosure of the company from the source [5].

A board secretary post is set up to coordinate information disclosure and board meetings according to the Company Law of the People’s Republic of China since 2006. The rules published in 2008 to govern the Listing of Stocks on Shanghai Stock Exchange and Shenzhen Stock Exchange encourage executives with real power to serve as board secretaries. As a bridge between listed companies and investors, board secretaries who cannot fully understand the company’s operations have difficulty conveying useful information to the capital market [6]. Therefore, to enhance the information disclosure function of the board secretary, executives with real power concurrently serve as the CFO and board secretary in many listed companies. As the producers of financial reports in listed companies, CFOs affect the quality of financial statements [7]. Thus, CFOs directly affect the financial statement comparability of listed companies.

Conclusion

Using the data of Chinese A-share listed firms from 2007 to 2021, this study investigates the effect of a CFO also serving as board secretary on financial statement comparability. The results show that a CFO who is also board secretary improves a firm’s financial statement comparability. Given that managers’ personal characteristics play a role in financial statement comparability, we investigate the effects of the personal characteristics of a CFO who also serves as board secretary on a firm’s financial statement comparability. Our results generally suggest that financial statement comparability is positively associated with a CFO who is female, is middle-aged, has a higher education level, and has a financial background. A CFO who serves as board secretary can shorten the information transmission chain within a firm, reducing information loss and improving financial statement comparability. This study provides evidence that a CFO serving as board secretary plays an important role in financial statement comparability. Listed firms should encourage CFOs to also serve as board secretaries, and appropriate consideration should be given to the selection of female middle-aged executives with higher education and a financial background for this role. In addition, investors should also consider a senior executive’s personal characteristics to make the most appropriate decisions possible. This study contributes to the internal governance of listed companies, as well as to the hiring of a CFO with any kind of personal characteristics, giving more references and assistance to the company and more benefits to the comparability of financial reports. To the extent that it helps listed companies to establish a good image in the capital market.

We investigate whether CFO debt-like compensation incentives and their alignment with CEO debt-like compensation incentives are associated with financial reporting quality. He (2015) finds that CEO debt-like compensation incentives are associated with higher financial reporting quality. Consistent with agency theory, we extend He (2015) by considering CFO debt-like compensation incentives. Overall, we find that CFO debt-like compensation incentives are associated with better financial reporting quality while controlling for CEO debtlike compensation incentives. These effects are present when the CEO and CFO compensation incentives are aligned with the same party. Further, the CFO effect dominates that of the CEO when examining discretionary accruals, and complements the CEO effect for accrual quality. However, we are unable to find any evidence of an incremental joint effect from the alignment of the CEO and CFO debt-like compensation incentives.

Introduction

We investigate whether CFO debt-like compensation incentives and their alignment with that of the CEO are associated with financial reporting quality. Agency theory suggests that managers’ equity (inside debt) holdings can align managers’ actions with shareholders’ (debtholders’) interests (Jensen & Meckling, 1976). Prior literature focuses on the role of individual managers’ equity-based compensation incentives and, more recently, CEO’s debt-like compensation incentives on financial reporting quality (e.g., Armstrong, Jagolinzer, & Larcker, 2010; Cheng & Warfield, 2005; Feng, Ge, Luo, & Shevlin, 2011; He, 2015). These studies document a negative (positive) relationship between CEO equity-based (debt-like) compensation and financial reporting quality. However, both the CEO and CFO of U.S. public firms are responsible for financial statement quality. While prior research shows the CFO equity incentives are associated with poorer financial statement quality, we extend this research by examining whether CFO debt-like incentives affect financial reporting quality. We further examine whether there is a joint effect when the CEO and CFO debt-like compensation incentives are aligned. Firms provide their executives incentive plans that are aligned with either shareholders or debtholders. Alignment with debtholders provides executives incentives to reduce information asymmetry and enhance financial reporting quality. He (2015) and Dhole, Manchiraiu, and Suk (2016) find evidence consistent with this expectation using CEO debt-like compensation incentives. We expect a similar relationship to hold for CFO debt-like compensation incentives because the CFO has a greater opportunity to influence financial reporting quality.

1- Introduction

2- Literature review

3- Methodology

4- Results

5- Robustness analysis

6- Conclusions

References

Abstract

This study investigates the influence of CFO roles on the implementation of ERM initiatives in a sample of Nigerian financial institutions (between 2013-2017). We develop three distinct factors representing the CFO roles namely CFO power, CFO experience and CFO knowledge using principal component factoring. Like prior work, we measure ERM components simultaneously to capture the extent of sophisticated ERM system. Our findings pose that the CFO involvement in ERM implementation remains minimal while the CRO is solely responsible for ERM implementation, which could undermine cost-benefit effectiveness. Our empirical evidence reports that the sophisticated ERM only promote the market evaluation while the accounting performance is undermined. The result then contravenes the expectation that effective ERM enhances accounting performance by mitigating risk exposure. While the sophisticated ERM is significantly positive with leverage, which reveals that ERM implementation does not necessarily reduce the firm risk. This indicates that the ERM implementation remains ineffective to mitigate risks, where the CFO involvement in the ERM initiative is limited. We then advocate that CFOs should be allowed to contribute strongly on some specific aspects of ERM initiatives namely identification and analysis of key risk indicators, the financial implication of risks and integration of ERM into traditional finance activities.

Introduction

With the complexity of the business environment, management seeks to mitigate risks and the ability of firms to identify those risks early has formed part of the critical success factor (Soltanizadeh et al., 2014). This discretion in identifying and managing risk has resulted in the application of different approaches in mitigating such risks. Different interpretations and approaches to mitigating risks have undermined the effective managing risks, which are basically based on prior knowledge, organizational roles and industry (IFAC, 2018; Ojeka et al., 2017a). For instance, the measurement and assessment of risk have been a predominantly quantitative exercise designed to avoid loss or fraud in financial institutions. Since the financial crisis, the adopted approach is tailored to adequately inform decisions and manage uncertainty. Risk management is viewed as activities to prevent rather than processes to retorting crisis. However, the arising challenge with applying this pattern of risk management, which relies solely on mitigating risks increases cost while the resultant benefits to the firm’s success and resilience remains minimal (IFAC, 2018). Enterprise Risk Management (henceforth ERM) is gaining ground among the practitioners and firms adopt it to identify and mitigate risk holistically. ERM approaches risk beyond silo-based view (Gordon et al., 2009). ERM requires the integration of different aspects of an organization and multiple procedures to collectively comprehend the level of an organization’s exposure to uncertainties, which could distort the business objectives and the prospects for growth. ERM analyzes available information, which identifies the success or failures of uncertainties while decisions are based on the potential courses of action. The key goal of risk management is to increase shareholders’ value (COSO, 2004; Pagach and Warr, 2011; Liebenberg and Hoyt, 2003).

Earnings are widely used by investors to evaluate firms’ prospective performance and managers are tempted to manipulate earnings to influence short-term stock prices. The incentives to engage in earnings management (EM) are stronger around initial public offerings (IPOs) due to the high level of information asymmetry between managers and investors. Prior research on EM around IPOs has provided evidence for positive abnormal accruals in the year of issue and a negative relation between at-issue abnormal accruals and post-issuelong-run stock performance, suggesting that managers manipulate earnings to mislead investors (Aharony, Lin, & Loeb, 1993; DuCharme, Malatesta, & Sefcik, 2004; Friedlan, 1994; Gramlich & Sorensen, 2004; Roosenbloom & van der Goot, 2003; Teoh, Welch, & Wong, 1998a; Teoh, Wong, & Rao, 1998b). Given the prevalence of the EM issue, researchers have extensively explored the determinants of EM, such as firm-level factors (e.g.,firm size, firm performance, leverage, growth, corporate governance, financing needs, and target beating) and external factors (e.g.,capital requirements and regulations; see Dechow, Ge, & Schrand, 2010, for a review). In the IPO context, several studies suggest the significance of external parties such as auditors, underwriters, venture capitalists, and credit rating agencies in restraining EM by IPO firms (Gounopoulos & Pham, 2017; Hochberg, 2012; Lee & Masulis, 2011; Morsfield & Tan, 2006; Venkataraman, Weber, & Willenborg, 2008; Wongsunwai, 2013). Moreover, increasing attention has been paid to examining manager-level factors driving EM. Research on the effects of managerial characteristics on accounting choices is primarily based on the upper echelons theory (Hambrick, 2007; Hambrick & Mason, 1984), which postulates that managerial background characteristics may partially influence top managers’ decision-making and organizational outcomes. Prior literature has documented the link between earnings quality and several managerial characteristics such as CEO reputation (Francis, Huang, Rajgopal, & Zang, 2008), superstar CEOs (Malmendier & Tate, 2009) and managerial ability (Demerjian, Lev, Lewis, & McVay, 2013). However, to the best of our knowledge, the impact of CEOs’ financial experience on EM around IPOs remains unexplored. The financial career background of CEOs may play an important role in determining the quality of financial reporting. The financial skills and experience that CEOs have accumulated over their career equip them with deeper understanding of financial and accounting issues, which they may draw upon to make proper accounting decisions and improve the financial reporting process. Moreover, extensive experience and interaction with the financial market make financial expert CEOs highly aware of the type of information demanded by investors and appreciative of the significance of accounting information in affecting investors’ firm evaluation (Custódio & Metzger, 2014). Thus, financial expert CEOs may have more incentives to provide high-quality financial reporting to the market so that investors can appropriately gauge the firms’ values. Furthermore, although CEOs are not directly involved in overseeing the accounting process, they can set the tone from the top and influence the decisions of chief financial officers (CFOs) (Feng, Ge, Luo, & Shevlin, 2011). The financial background facilitates communication between CEOs and CFOs, allowing them to effectively work together to develop sound accounting policies.

1- Introduction

2- Literature review and hypothesis development

3- Research methods

4- Results

5- Conclusion

References

Abstract

We investigate how overconfident CEOs and CFOs may interact to influence firms’ tax avoidance. We adopt an equity measure to capture overconfident CEOs and CFOs and utilize multiple measures to identify companies’ tax-avoidance activities. We document that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions in regard to tax avoidance. Specifically, we find that companies are more likely to engage in tax-avoidance activities when they have both overconfident CEOs and overconfident CFOs, compared with companies that have other combinations of CEO/CFO overconfidence (e.g., an overconfident CEO with a non-overconfident CFO), which is consistent with the False Consensus Effect Theory. Our study helps investors, regulators, and policymakers understand companies’ decision-making processes with regard to tax avoidance.

Introduction

Overconfidence has been found to be a common personal trait among CEOs and may have an effect on CEOs’ investment decisions and financial reporting choices (Goel and Thakor, 2008). Upper Echelons theory suggests that organizational behaviors reflect the personal traits of top executives (Hambrick, 2016; Hambrick and Mason, 1984),1 and CEO overconfidence may play an important role in corporate policy setting and strategic decisions. The literature has shown that companies with overconfident CEOs are more likely to have higher-level investments (Brown and Sarma, 2007; Malmendier and Tate, 2005, 2008), more innovative activities, and greater innovation success (Galasso and Simcoe, 2011; Hirshleifer et al., 2012) relative to companies with non-overconfident CEOs. Overconfident CEOs also need stronger cash inflows as compared to non-overconfident CEOs to satisfy their investment and innovation funding needs (Richardson, 2006). Prior studies, however, also document that overconfident CEOs tend to overestimate their ability to generate earnings, which may create discrepancies between companies’ real performance and their earnings expectations, resulting in the management of financial results to meet their expectations and satisfy their confidence needs (Gilson, 1989; Hribar and Yang, 2016; Hsieh et al., 2014; Schrand and Zechman, 2012). Tax avoidance may serve as an effective earnings management tool for companies to meet their earnings target, while alleviating their tax burden and increasing cash flows (Desai and Dharmapala, 2009; Halon, 2005; Phillips et al., 2003). Therefore, overconfident CEOs are more likely to promote tax avoidance, which is reflected in lower corporate effective tax rates (Olsen and Stekelberg, 2015). Although the impact of CEO overconfidence on corporate decision-making processes is understood, it should be noted that CEOs may rely on CFOs to execute their financial reporting decisions (Jiang et al., 2010). Feng et al. (2011) also suggest that CFOs use their financial expertise to manipulate earnings because they succumb to pressure from CEOs for earnings management. Practitioners also recognize the importance of CFOs in financial reporting-related issues and call for closer scrutiny of the backgrounds and qualifications of CFOs who assist CEOs, as their business partners, in their decision-making processes (Cox, 2013; Egon Zehnder, 2016). AESC (2015) argues that CFOs should possess the right chemistry (e.g., matched personality traits and similar beliefs) to collaborate with CEOs for the most effective and efficient management of the company. This contention is consistent with the False Consensus Effect, a psychological theory posits that people tend to selectively expose themselves to those who possess similar personality traits and, thus, share similar beliefs and values (Bahns et al., 2017). This selective exposure may lead to a cognitive bias of judgmental consensus in a social environment and, thus, exaggerate the overconfidence effect in a social relationship for people who share similar personality traits (Aronson et al., 2015; Bauman and Geher, 2002). Following these arguments, we investigate whether companies are more likely to engage in tax-avoidance activities when they have both an overconfident CEO and overconfident CFO, relative to other CEO/CFO combinations as based on their overconfident personality traits.

1- Introduction

2- Literature and hypotheses

3- Method

4- Results

5- Discussion and conclusions

References

Abstract

Given concerns over CFO pay, especially incentives, and considering the tension between a CFO’s fiduciary responsibility and being a key member of the firm’s executive team, we examine the determinants and effects of CFO compensation amount, incentive intensity, and proximity to CEO compensation in a sample of European companies (FTE 500, 2005–2009). First, we focus on the CFO role as a determinant of CFO compensation. Like prior work, we proxy for CFO roles by using hand-collected public data on education and past professional experience, but we supplement these proxies with proprietary data to more directly capture the firm-specific nature of the CFO job in term of its similarity with that of the CEO. We thus argue how CFOs can have varied roles characterized by different levels of financial expertise and CEO-likeness, and document that it is this latter aspect that is associated with CFO compensation. Second, we study the effects of CFO compensation design on outcomes in the CFO’s realm related to financial reporting. We find that CFO financial expertise is positively associated with financial reporting quality, while a CFO’s pay long-term incentive intensity and a CFO’s incentive compensation proximity with the CEO are negatively associated with financial reporting quality. Overall, then, our results suggest that CFOs get rewarded for their CEO-likeness, and particularly for their being similar to the CEO in terms of tasks and decision making authority. But it is their financial expertise that is positively related to financial reporting quality. At the same time, using compensation that is more incentive intensive and more similar to that of the CEO appears to be potentially detrimental to the quality of financial reporting. These results are relevant for boards involved in selecting highly expert CFOs, and their compensation committees charged with defining subsequently effective incentive compensation plans for those CFOs.

Introduction

In many companies, CFOs are second in command to the CEO,1 where both commonly appear in public together to comment on company developments beyond the required periodic disclosures of financial performance (Hoitash et al., 2016). This is not surprising as nowadays companies often seek CFOs who are actively involved in major business decisions and not just in financial reporting and other CFO functional duties. Unlike other finance and accounting positions who are mainly in charge of the technical aspects of accounting and financial reporting, CFOs are increasingly becoming involved in shaping and executing corporate strategy (Datta and Datta, 2014). They participate in decision making as members of the senior executive team, are involved in strategy and operations as business partners of the CEO, and also often sit on the board.2 At the same time, due to their specialized expertise and unique technical knowledge, CFOs have more influence than CEOs over the firm’s financial reports (e.g., Mian, 2001; Aier et al., 2005, Geiger and North, 2006) and they are expected to be the gatekeepers or watchdogs of financial information accuracy. This is akin to characterizing the CFO role as a peculiar mix of fiduciary duties over financial reporting and managerial involvement in decision-making (Indjejikian and Matějka, 2009). Given that firms inevitably must handle such CFO “role duality” judiciously, our study contributes to the literature by considering CFO role characteristics as well as the determinants and effects of CFO compensation. Specifically, we address two research questions. First, we investigate whether differences in CFO role characteristics are associated with differences in CFO compensation, including CFO compensation relative to that of their CEO. Second, in line with prior work (e.g., Graham et al., 2005; Mergenthaler et al., 2012), and echoing concerns of policy makers and regulators, we examine whether CFO compensation has an effect on the propensity of CFOs to monitor and fulfill their fiduciary obligations (Li, 2014), which we proxy in terms of financial reporting quality. In this second part, we also include in our tests the effect of CFO role characteristics directly on financial reporting quality. Our operationalization of “CFO role” constitutes an extension of prior work. As in prior work, we proxy for CFO roles by using hand-collected public data on education and past professional experience and skills, but additionally, we supplement these proxies with proprietary data to more directly capture the firm-specific nature of the CFO job and responsibilities. These data were entrusted to us by one of the major global compensation consulting firms and allow us to consider different manifestations of firm-specific CFO jobs and tasks through a “CEO-CFO distance” measure of the extent to which the CFO job is more or less similar to that of their CEO. In this way, we identify two key role dimensions through factor analysis which we label “financial expertise” and “CEO likeness”.

Introduction

Institutional background

Literature review and hypotheses

development

Research design

Empirical results

Discussion and conclusion

References

Abstract

We examine the effects of four key dimensions of Chief Executive Officers’ (CEOs’) traits on six financial performance metrics using panel data for 1999−2012 drawn from the UK’s property−casualty insurance industry. We find that CEO insurance experience and CEO financial expertise enhance financial performance, while two other CEO traits − power and age − are generally not significant. Our results thus reinforce the importance of CEO insurance industry expertise and CEO financial expertise in the management and trading of risks. Our results have potential commercial and policy implications.

Introduction

Nowhere are financial performance indicators so central to corporate governance and the realization of strategic activities than in firms engaged in the trading, bearing and management of extreme risks such as those operating in the insurance industry (Landier et al., 2012). Insurance is a highly specialized and technically complex commercial activity (e.g. in terms of risk selection and pricing) that protects the consumers of insurance (the policyholders) from contractually contingent economic losses through the effective diversification of assumed risks and returns on invested assets (Knights and Vurdubakis, 1993). Another distinguishing feature of insurance is that, in contrast to other industries, the management of risk and uncertainty impacts directly on policyholders as the value of their future financial claims is dependent on the strength and condition of the insurance provider (Desai, 2014). As a result, insurers are archetypal risk-bearing/risk-trading enterprises whose financial model involves managing balance sheet assets and liabilities through the matching of cash inflows from written premiums and income from well-diversified investment portfolios with cash outflows on settled claims and business expenses (Starita and Malafronte, 2014). In developed insurance markets, such as the UK, insurers operate within a stringent statutory and regulatory framework that is designed to maintain financial resilience and protect the fixed contractual claims of policyholders (Gaa and Krinsky, 1988). Additionally, since the 1980s the international insurance industry has been subject to increased product-market competition, increased scrutiny by the public media and heightened financial constraints (Knights and Willmott, 1993). Moreover, board-level financial expertise has become particularly pertinent in insurance firms since the UK’s Financial Services and Markets Act (2000) and the greater degree of statutory compliance that it imposed, including regulatory approval of senior executive appointments (Dewing and Russell, 2008). Together these institutional factors necessitate that the Chief Executive Officers (CEOs) of insurance firms are proficient in the technical and governance aspects of risk and insurance, and have sufficient firm-related knowledge and financial management acumen to make strategic decisions that maximize firm value within the confines of regulation and market competition. These considerations could increase the need for the CEOs of insurance firms to use their discretion and influence in initiating and directing strategic decisions.