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Implications of a Multi-Purpose Reporting System on CEO and CFO Incentives and Risk Preferences

54 Pages Posted: 23 Feb 2014 Last revised: 19 May 2016

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

Date Written: April 10, 2016

Abstract

This paper presents a model in which the CEO generates productive output while the CFO oversees a reporting system that provides information useful for monitoring, decision-making, and contracting, but is also subject to costly manipulation. Because the reporting system serves multiple roles, the CEO's compensation incentives and the quality of the reporting system can be substitutes or complements. When they are substitutes, the CEO's incentive compensation is positively related to performance metric risk, firm value can be increasing in the CFO's risk aversion, and high biasing costs can reduce the positive association between firm value and CFO risk aversion. Whether they are primarily substitutes or complements can depend on the speed of decreasing returns to scale in the production function. The potential value of CEO-CFO collusion in this setting is explored in an extension.

Keywords: Reporting, bias, CEO, CFO, risk aversion

Suggested Citation

Friedman, Henry L., Implications of a Multi-Purpose Reporting System on CEO and CFO Incentives and Risk Preferences (April 10, 2016). Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2399690 or http://dx.doi.org/10.2139/ssrn.2399690

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D416 Anderson Complex
Los Angeles, CA 90095-1481
United States

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