Does Appointing a Former CFO as CEO Influence a Firm’s Accounting Policies?

Abstract

We study CEO successions to investigate the factors that lead a firm to select an individual with CFO experience for their CEO and whether appointing a former CFO leads to systematic changes in financial reporting, disclosure, and tax policies relative to other CEO appointments. Consistent with the “fit/refit” model, we find that the selection of a former CFO is associated with several changes in firm characteristics leading up to the appointment, including increases in analyst coverage, analyst forecast dispersion, and absolute discretionary accruals. We also document improvements in the firms’ reporting and disclosure quality after the appointment of a CEO with CFO experience relative to appointments of other CEOs. Our study provides insight into the circumstances under which CFO experience is valued in the top leadership position of the firm and the reasons underlying the documented effect of individual CEOs on a firm’s accounting policies.

Keywords: CEO succession, CEO functional experience, financial reporting policy, disclosure policy, tax policy