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Table of Contents

CFO Narcissism and Financial Reporting Quality

Charles (Chad) Ham, Washington University in Saint Louis - John M. Olin Business School
Mark H. Lang, University of North Carolina at Chapel Hill
Nicholas Seybert, University of Maryland - Department of Accounting & Information Assurance
Sean Wang, University of North Carolina - Kenan-Flagler Business School

The Gordon Gekko Effect: The Role of Culture in the Financial Industry

Andrew W. Lo, Massachusetts Institute of Technology (MIT) - Sloan School of Management, National Bureau of Economic Research (NBER)

Regulating CEO Narcissism

Eric de Bodt, Université Lille Nord de France - SKEMA Business School
Helen Bollaert, Université de Lille - SKEMA Business School
Pascal Grandin, Université Lille Nord de France - Skema Business School
Richard Roll, California Institute of Technology

Do CEO Beliefs Affect Corporate Cash Holdings?

Sanjay Deshmukh, DePaul University - Department of Finance
Anand M. Goel, Navigant Consulting, Inc.
Keith M. Howe, DePaul University - Department of Finance

CEO Narcissism, Accounting Quality, and External Audit Fees

J. Scott Judd, University of Arizona - Department of Accounting
Kari Joseph Olsen, Utah State University
James Stekelberg, University of Arizona - Department of Accounting

Lost in Transition: Trust and CEO Succession

Alex G.H. Chu, Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management
Vicki Wei Tang, Georgetown University - Robert Emmett McDonough School of Business


CORPORATE GOVERNANCE & SOCIOLOGY OR PSYCHOLOGY eJOURNAL
Sponsored by IRRC Institute

"CFO Narcissism and Financial Reporting Quality" Free Download
Robert H. Smith School Research Paper No. RHS 2581157

CHARLES (CHAD) HAM, Washington University in Saint Louis - John M. Olin Business School
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MARK H. LANG, University of North Carolina at Chapel Hill
Email:
NICHOLAS SEYBERT, University of Maryland - Department of Accounting & Information Assurance
Email:
SEAN WANG, University of North Carolina - Kenan-Flagler Business School
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We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting outcomes. Experimentally, we validate that narcissism predicts misreporting behavior, and that signature size predicts misreporting through its association with narcissism. Empirically, we examine notarized CFO signatures and find CFO narcissism to be associated with more earnings management, less timely loss recognition, weaker internal controls, and a higher probability of restatements. Results are consistent for within-firm comparisons focusing on CFO changes and are robust to controlling for overconfidence and CEO narcissism. These results highlight the importance of CFO characteristics in the domain of financial reporting decisions.

"The Gordon Gekko Effect: The Role of Culture in the Financial Industry" Free Download

ANDREW W. LO, Massachusetts Institute of Technology (MIT) - Sloan School of Management, National Bureau of Economic Research (NBER)
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Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the recent financial crisis. I present a brief overview of the role of culture according to psychologists, sociologists, and economists, and then present a specific framework for analyzing culture in the context of financial practices and institutions in which three questions are answered: (1) What is culture?; (2) Does it matter?; and (3) Can it be changed? I illustrate the utility of this framework by applying it to five concrete situations — Long Term Capital Management; AIG Financial Products; Lehman Brothers and Repo 105; Société Générale’s rogue trader; and the SEC and the Madoff Ponzi scheme — and conclude with a proposal to change culture via “behavioral risk management.?

"Regulating CEO Narcissism" Free Download

ERIC DE BODT, Université Lille Nord de France - SKEMA Business School
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HELEN BOLLAERT, Université de Lille - SKEMA Business School
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PASCAL GRANDIN, Université Lille Nord de France - Skema Business School
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RICHARD ROLL, California Institute of Technology
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We analyze how boards use monitoring mechanisms, in particular the compensation package, to regulate CEO narcissism and maintain it at an appropriate level which protects shareholder interests. We first develop a model which formalizes the desirable level of CEO narcissism from the shareholders' point of view. We then use the model to interpret the relations that we find between the variation in CEO narcissism and the lagged level of compensation package components, controlling for governance mechanisms and firm characteristics. Our empirical evidence is based on a ten-year panel data set tracking S&P500 CEO narcissism. Our results clearly support that the time-varying component of CEO narcissism is affected by the compensation package (specifically cash bonuses) and that shareholders are therefore in position to control (to some extent) the evolution of CEO narcissism.

"Do CEO Beliefs Affect Corporate Cash Holdings?" Free Download

SANJAY DESHMUKH, DePaul University - Department of Finance
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ANAND M. GOEL, Navigant Consulting, Inc.
Email:
KEITH M. HOWE, DePaul University - Department of Finance
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We develop an expanded trade-off model of cash holdings that incorporates CEO beliefs. The optimistic CEO views external ?nancing as excessively costly but expects this cost to decline over time, thus delaying external ?nancing and maintaining a lower cash balance than rational CEOs. We ?nd that, relative to rational CEOs, optimistic CEOs hold 24% less cash, exhibit a lower change in cash holdings over time, hold lower cash to fund the ?rm’s growth opportunities, and save less cash out of current cash flow. We con?rm our ?ndings with two different samples of ?rms and two alternative measures of optimism.

"CEO Narcissism, Accounting Quality, and External Audit Fees" Free Download

J. SCOTT JUDD, University of Arizona - Department of Accounting
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KARI JOSEPH OLSEN, Utah State University
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JAMES STEKELBERG, University of Arizona - Department of Accounting
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Firms with narcissistic CEOs present greater audit risk, as prior research indicates that narcissistic CEOs are more likely to engage in risky business practices and be perceived to be greater fraud risks. We extend this literature by documenting that CEO narcissism negatively affects a firm’s accounting quality and has an economically and statistically significant positive effect on external audit fees. We also find that CEO narcissism increases the likelihood of auditor resignation. This study contributes to the audit literature by documenting how auditors price their audit engagements in response to executive personality characteristics, in particular CEO narcissism.

"Lost in Transition: Trust and CEO Succession" Free Download
Georgetown McDonough School of Business Research Paper No. 2618349

ALEX G.H. CHU, Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management
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VICKI WEI TANG, Georgetown University - Robert Emmett McDonough School of Business
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This study examines whether the level of generalized trust influences the succession decision and the subsequent firm performance. Generalized trust is defined as the trust people have toward a random member of an identifiable group. Empirically, we explore the cross-province variation within China to identify the effect of generalized trust on CEO succession. First, we find that, after controlling for firm and founder characteristics, founders in provinces with lower level of generalized trust are more likely to choose family successors. Second, conditional on a non-family successor, founders in provinces with lower level of generalized trust are more likely to choose successors who are geographically close to the founder’s birthplace. Third, to identify the causal nature of those correlations, we find that founders are less likely to choose successors from provinces that experience trust crises in the post-crisis period. The set of evidence suggests that generalized trust influence corporate succession decisions. Finally, we find that, firms with family successors have less persistent industry-adjusted profitability than firms with non-family successors in the post-succession period. Overall, the empirical findings are consistent with the theoretical prediction that generalized trust (or lack thereof) has first-order economic effects.

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About this eJournal

Sponsored by: IRRC Institute

This eJournal distributes working and accepted paper abstracts that deal with all aspects of governance related to sociology and psychology. The journal welcomes research with a focus on using tools and methods from the fields of sociology and psychology to study corporate governance. Topics of interest include, but are not limited to, how corporate governance arrangements are shaped by or shape social norms, psychological inclinations, and cognitive perceptions.

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CGN SUBJECT MATTER EJOURNALS

LUCIAN A. BEBCHUK
Harvard Law School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Email: bebchuk@law.harvard.edu

Please contact us at the above addresses with your comments, questions or suggestions for CGN-Sub.

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Corporate Governance & Sociology or Psychology eJournal

PATRICK BOLTON
Barbara and David Zalaznick Professor of Business, Columbia Business School - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

BRIAN R. CHEFFINS
S.J. Berwin Professor of Corporate Law, University of Cambridge - Faculty of Law, Fellow, European Corporate Governance Institute (ECGI)

JOHN C. COFFEE
Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance, Columbia Law School, Fellow, European Corporate Governance Institute (ECGI), Fellow, American Academy of Arts & Sciences

JULIAN R. FRANKS
Professor of Finance, London Business School, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

HENRY HANSMANN
Augustus E. Lines Professor of Law, Yale Law School, Fellow, European Corporate Governance Institute (ECGI)

OLIVER D. HART
Andrew E. Furer Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

BENGT R. HOLMSTRÖM
Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)

KLAUS J. HOPT
Director (em.), Max Planck Institute for Comparative and International Private Law, European Corporate Governance Institute (ECGI)

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

HIDEKI KANDA
Professor of Law, University of Tokyo - Graduate School of Law and Politics

STEVEN NEIL KAPLAN
Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

RAKESH KHURANA
Marvin Bower Professor of Leadership Development, Harvard Business School

DAVID F. LARCKER
James Irvin Miller Professor of Accounting, Stanford University - Graduate School of Business

CHRISTIAN LEUZ
J. Sondheimer Professor of International Economics, Finance and Accounting, University of Chicago - Booth School of Business, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI), Fellow, Center for Financial Studies (CFS), Fellow, University of Pennsylvania - Wharton Financial Institutions Center, Fellow, CESifo Research Network

MARCO PAGANO
Professor of Economics, University of Naples Federico II - Department of Economics and Statistics, Director, Centre for Studies in Economics and Finance (CSEF), President, Einaudi Institute for Economics and Finance (EIEF), Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

RAGHURAM G. RAJAN
Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

ROBERTA ROMANO
Sterling Professor of Law and Director, Yale Law School Center for the Study of Corporate Law, Yale Law School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ANDREI SHLEIFER
Professor of Economics, Harvard University - Department of Economics, Fellow, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

LAURA T. STARKS
Charles E. and Sarah M. Seay Regents Chair in Finance, University of Texas at Austin - Department of Finance

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JEAN TIROLE
Scientific Director, University of Toulouse 1 - Industrial Economic Institute (IDEI), University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ), Fellow, Centre for Economic Policy Research (CEPR)

LUIGI ZINGALES
Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER), Fellow, Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Fellow, European Corporate Governance Institute (ECGI)