Does Managerial Risk Aversion Affect Earnings Management? Evidence from CEO Political Ideology

53 Pages Posted: 24 May 2018 Last revised: 31 May 2018

See all articles by Mingcherng Deng

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Joanna L.Y. Ho

University of California, Irvine - Accounting Area

Shuo Li

Western Washington University

Date Written: May 13, 2018

Abstract

We investigate whether managerial risk aversion, as measured by CEO political ideology, affects corporate decisions to undertake earnings management. Using a sample of 10,799 firm-year observations for S&P 1500 firms during the period from 1996 to 2008, we document that Republican CEOs, who tend to have a conservative ideology and be risk-averse, engage in less accrual-based earnings management but more real earnings management than Democratic CEOs. The impacts of managerial risk aversion on earnings management are incremental to the impacts of managerial incentive-based compensation and certain managerial attributes. Our main findings are robust to various sensitivity checks and to controls for potential endogeneity concerns. Importantly, we show that management control mechanisms (i.e., family ownership and CEO political ideology misalignment with subordinate executives in top management teams) can further constrain CEOs’ opportunistic earnings management behaviors. Taken together, our findings suggest that CEOs with strong political ideology have discretion to translate their personal risk attitude into earnings management decisions.

Keywords: political ideology, campaign contributions, accrual-based earnings management, real earnings management, risk aversion, behavioral consistency theory, upper echelon theory

JEL Classification: M41, M48, M50

Suggested Citation

Deng, Mingcherng and Ho, Joanna L.Y. and Li, Shuo, Does Managerial Risk Aversion Affect Earnings Management? Evidence from CEO Political Ideology (May 13, 2018). Baruch College Zicklin School of Business Research Paper No. 2018-05-06. Available at SSRN: https://ssrn.com/abstract=3177886 or http://dx.doi.org/10.2139/ssrn.3177886

Mingcherng Deng (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Joanna L.Y. Ho

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States
949-824-4041 (Phone)
949-725-2833 (Fax)

Shuo Li

Western Washington University ( email )

United States
3606503202 (Phone)

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