The Strategic Engagement of Narcissistic CEOs in Earnings Management
46 Pages Posted: 9 Nov 2014
Date Written: November 7, 2014
In corporate governance literature, the focus often lies on ex-post mechanisms like the composition of the board of directors or ownership structure and their impact on restricting earnings manipulation (García-Meca & Sánchez-Ballesta, 2009). In addition to that a recent string of literature takes personality characteristics like striving for reputation or prestige as an ex-ante measure into account to investigate the relationship between management decisions and managerial misbehaviour (Malmendier & Tate, 2009). This study extends the latter line of literature by examining the relationship between chief executive officers’ (CEOs) narcissistic behaviour and firms’ financial reporting. It is argued that narcissistic persons manipulate accounting choices to enhance a firm’s and inherently their particular track record with the intention of achieving self-enhancement (Olsen, Dworkis, & Young, 2013). To measure an individual’s personality we build on a set of 15 indicators reflecting narcissistic behaviour of 1,126 CEOs in 671 companies listed in the S&P 500 index for the period of 1992 to 2012. Accrual- and real-operating-based earnings management are proxies for managerial misbehaviour. The results give evidence for an engagement of highly narcissistic CEOs in accrual-based earnings management. Interestingly, CEOs with a high narcissistic personality do not solely strive for increasing earnings by accounting choices. They also lower earnings; especially in the first two years they serve on the board when compared to their less narcissistic peers. Robust to anomalies, which occur in appearance of CEO turnover and succession, we conclude that these CEOs make strategic use of accrual-based earnings in order to polish up the personal track record of their tenure in subsequent years.
Keywords: Narcissism, Decision Making, Earnings Management, Behavioural Accounting Research
JEL Classification: G34, M14, M41, M51
Suggested Citation: Suggested Citation