Implications of Power: When the CEO Can Pressure the CFO to Bias Reports

61 Pages Posted: 20 Jun 2014

See all articles by Henry L. Friedman

Henry L. Friedman

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

Date Written: June 18, 2014

Abstract

Building on archival, anecdotal, and survey evidence on managers' roles in accounting manipulations, I develop an agency model to examine the effects of a CEO's power to pressure a CFO to bias a performance measure, like earnings. This power has implications for incentive compensation, reporting quality, firm value, and information rents. Predictions from the model provide potential explanations for the differing results from recent empirical studies on the impact of regulatory interventions like SOX and the extent to which the CEO's or CFO's incentives significantly impact on earnings management. The model also identifies conditions under which either a powerful or a non-powerful CEO can extract rents, which can help explain mixed empirical results on the association between CEO power and "excessive" compensation.

Keywords: reporting, bias, countervailing incentives, CEO power

Suggested Citation

Friedman, Henry L., Implications of Power: When the CEO Can Pressure the CFO to Bias Reports (June 18, 2014). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2456468

Henry L. Friedman (Contact Author)

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

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

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