Implied Tradeoffs of CFO Accounting Expertise: Evidence from Firm-Manager Matching

Abstract

We present evidence that, while individuals with accounting expertise bring key skills to financial reporting responsibilities of the CFO position, they tend to lack educational and career experiences relevant to non-accounting responsibilities (e.g., operations and strategy). Assuming boards’ perceptions of CFO accounting expertise are correct on average, we provide evidence of tradeoffs of CFO accounting expertise by examining how differences in CFO backgrounds shape executive employment decisions. Firms with greater demand for non-accounting expertise are less likely to hire an accounting expert CFO, consistent with ex ante firm-manager matching. Ex post, significant declines in firm-manager fit after appointment predict CFO turnover and other compensating changes in the composition of the senior management team. Accounting expert CFOs are also less likely to become CEOs, suggesting that CFO experience does not fully mitigate these tradeoffs. Collectively, the results suggest important tradeoffs inherent to CFO accounting expertise that shape the structure of the senior management team.

Keywords: Firm-manager matching, CFO expertise, top management team, Chief Financial Officer

JEL Classification: M41, M54, J24