The Strategic Engagement of Narcissistic CEOs in Earnings Management

46 Pages Posted: 9 Nov 2014

See all articles by Frerich Buchholz

Frerich Buchholz

University of Oldenburg - Accounting and Corporate Governance

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Karen Maas

Erasmus University Rotterdam (EUR)

Date Written: November 7, 2014

Abstract

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

Buchholz, Frerich and Lopatta, Kerstin and Maas, Karen, The Strategic Engagement of Narcissistic CEOs in Earnings Management (November 7, 2014). Available at SSRN: https://ssrn.com/abstract=2520528 or http://dx.doi.org/10.2139/ssrn.2520528

Frerich Buchholz

University of Oldenburg - Accounting and Corporate Governance ( email )

Oldenburg, D 26111
Germany

Kerstin Lopatta (Contact Author)

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Karen Maas

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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