39 Pages Posted: 21 Feb 2011 Last revised: 20 Nov 2011
Date Written: November 18, 2011
We study the role of executive functional background in explaining management discretion in financial reporting. Taking goodwill impairment as our reporting setting, we focus on top executives (CEOs and CFOs) whose employment history includes experience in investment banking, private equity, venture capital or management consulting, as we expect these executives to have unique human capital and reputation concerns with respect to acquisitions and valuation modeling related to fair-value reporting. On average, we document that CFOs with prior transaction experience impair goodwill more frequently and in smaller amounts than other executives. Further investigation suggests that CFOs with prior transaction experience report goodwill that is more value relevant. This is consistent with CFO valuation expertise helping impair goodwill in a more informative manner. In contrast, CEOs with prior transaction experience appear to be subject to agency conflicts that affect their propensity to impair goodwill. Overall, our results not only suggest that executive functional background is a significant explanatory factor of financial reporting discretion, but also that a better understanding of its effect relies upon analyses of specific settings and predictions grounded in upper echelons theory and agency theory.
Keywords: goodwill impairment, executive background
Suggested Citation: Suggested Citation
Brochet, Francois and Welch, Kyle T., Top Executive Background and Financial Reporting Choice (November 18, 2011). Harvard Business School Research Paper No. 1765928. Available at SSRN: https://ssrn.com/abstract=1765928 or http://dx.doi.org/10.2139/ssrn.1765928