Chief Operating Officers and Real Earnings Management
56 Pages Posted: 18 Aug 2018 Last revised: 2 Jun 2019
Date Written: May 08, 2019
Because Chief Operating Officers (COOs) are responsible for internal operations and because the use of real earnings management (REM) can have negative consequences on longterm operating performance, we posit that COO firms will be less likely to use REM to inflate near-term earnings. Consistent with this, we find that the level of REM is lower for firms with COOs in their list of named executive officers than for other firms. In subsequent tests, we investigate whether the use of REM varies based on whether COOs are dedicated operations officers or are likely to ascend to the Chief Executive Officer position. Using several approaches to classifying COOs as dedicated versus non-dedicated, we find that relative to firms with nondedicated COOs and firms without COOs, firms with dedicated COOs engage in less REM. Overall, our results suggest that the presence of a COO restricts the use of REM on average, and that this effect is driven by those COOs who are dedicated operations officers.
Keywords: chief operating officers, C-suite, earnings management, real earnings management, top management
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