CEO Ability and Regulatory Review Risk

Hesarzadeh, R., Bazrafshan, A. (2019). "CEO ability and regulatory review risk", Managerial Auditing Journal, Vol. 34 Issue: 5, pp.571-601

Posted: 12 Jun 2019

See all articles by Reza Hesarzadeh

Reza Hesarzadeh

Ferdowsi University of Mashhad

Ameneh Bazrafshan

Imam Reza International University

Date Written: May 25, 2019

Abstract

Purpose: Chief executive officer (CEO) ability may have an effect on various corporate reporting decisions, and consequently, the CEO ability is subject to scrutiny by regulatory reviewers. However, theoretical literature provides mixed evidence on how the CEO ability affects the regulatory review risk. Thus, this study aims to empirically examine the effect of CEO ability on regulatory review risk.

Design/methodology/approach: To measure CEO ability, this study uses the CEO ability-score developed by Demerjian et al. (2012). Further, to measure regulatory review risk, the study uses the probability of receiving a comment letter from the Securities and Exchange Organization of Iran.

Findings: This study finds that the relationship between CEO ability and regulatory review risk is generally negative and statistically significant but not economically significant, i.e. the relationship is very small. In this regard, the study shows that the relationship is negative and also statistically and economically significant for firms with low levels of agency conflicts and high levels of corporate governance quality; and is positive and also statistically and economically significant for firms with high levels of agency conflicts and low levels of corporate governance quality. In addition, while the study finds no evidence that the regulatory reviewers’ workload compression influences the general relationship between CEO ability and regulatory review risk, it documents that low (high) regulatory reviewers’ workload compression weakens (strengthens) both the relationships stated above.

Originality/value: Collectively, the results suggest that the agency conflicts/corporate governance quality and regulatory reviewers’ workload compression are important factors in the analysis of the relationship between the CEO ability and regulatory review risk. The results offer insights into the opposing theoretical viewpoints about the relationship between CEO ability and regulatory review risk. Thus, the results will be of interest to boards of directors and other stakeholders involved in the regulatory review process.

Keywords: Corporate Governance, Agency Conflicts, Comment Letters, Regulatory Review Risk, CEO Ability, Management, Heuristic Cues Theory

JEL Classification: G32, M42, M48

Suggested Citation

Hesarzadeh, Reza and Bazrafshan, Ameneh, CEO Ability and Regulatory Review Risk (May 25, 2019). Hesarzadeh, R., Bazrafshan, A. (2019). "CEO ability and regulatory review risk", Managerial Auditing Journal, Vol. 34 Issue: 5, pp.571-601, Available at SSRN: https://ssrn.com/abstract=3394160

Reza Hesarzadeh (Contact Author)

Ferdowsi University of Mashhad ( email )

Mashhad, 9177948974
Iran

HOME PAGE: http://Hesarzadeh.profcms.um.ac.ir/

Ameneh Bazrafshan

Imam Reza International University ( email )

Felestin Square, Mashhad, 91735553 Iran
Mashhad, 91735553
Iran

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