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30-11-2023 | Original Research

Chalk it up to experience: CEO general ability and earnings management

Authors: Leila Zbib, Kourosh Amirkhani, Douglas Fairhurst

Published in: Review of Quantitative Finance and Accounting

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Abstract

We provide evidence that firms managed by CEOs with high general ability, or broad experience in their background, are more likely to utilize discretionary accruals to manage earnings than CEOs with focused experience. Cross-sectional variation suggests that the mechanism underlying the increased use of discretionary accruals is generalist CEOs’ increased willingness to bear the risk inherent in managing earnings given their enhanced tolerance for failure stemming from outside career options. Importantly, the practice is more pronounced for CEOs of firms with suspect earnings. To better control for unobservable variation between generalists and specialists, we use a propensity score-match sample and entropy balancing to adjust the sample to balance differences between firms with generalists and firms with specialists and firm fixed effects. The evidence suggests that the diversity of CEOs’ experience influences incentives to manage earnings. The increased trend to hire generalist CEOs may be coupled with an unintended increase in the use of discretionary accruals, largely stemming from the outside employment options of these executives.

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Appendix
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Footnotes
1
The results in the paper are robust to firm-level clustering.
 
2
Our primary control for tenure is the length of service of a CEO at her/his current institution. Another concern may be that results are driven by tenure across all institutions that the CEO has worked at. In unreported results, we find that including this measure has no material impact on the findings.
 
3
Some literature suggests that firms do not use writedowns as a way to strategically manage earnings by using discretionary accruals (e.g., Rees et al. 1996). We find evidence of this. Specifically, the coefficient on the level term for writedowns is negative and significant, suggesting that firms do not use writedowns to strategically manage earnings, on average. The interaction suggests that generalists are statistically more likely to utilize writedowns in this way, consistent with the notion that these CEOs are more willing to take risk in managing earnings.
 
4
The control variable for managerial ability in the paper is based on raw values. In unreported results, we also find that the results are robust if we use ranked values of managerial ability.
 
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Metadata
Title
Chalk it up to experience: CEO general ability and earnings management
Authors
Leila Zbib
Kourosh Amirkhani
Douglas Fairhurst
Publication date
30-11-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01228-2