Financial Reporting Consequences of CEOs’ Early-life Exposure to Disasters and Violent Crime

Abstract

Understanding the behavior of chief executive officers (CEOs) enables investors, regulators, and others to better appreciate the corporate decisions a CEO makes. Among the many aspects that determine CEO behavior are early-life experiences, we examine whether a CEO’s exposure to two important events — fatal natural disasters and violent crime — during the individual’s formative years is associated with the firm’s financial reporting quality. We provide evidence of a non-monotonic association between early-life exposures to such events and financial reporting outcomes. When a CEO has moderate levels of early-life exposure to deaths associated with natural disasters or to violent crimes, financial reporting quality is lower, consistent with the CEO being over-confident in dealing with risk. However, as exposure increases to extreme levels, the CEO becomes more aware of the risk effect and, as a result, more careful about decisions that could elevate the firm’s risk; thus, we find evidence of higher financial reporting quality.

Keywords: CEO Early-life exposure, natural disasters, violent crime, financial reporting quality

JEL Classification: D81, G32, M41, M54, Q54