Career Concerns and Financial Reporting Quality
Posted: 28 Jun 2021
Date Written: June 12, 2021
Managerial career concerns could affect firm efficiency through financial reporting quality, but this important link has received relatively little attention in the literature. The present study examines this link by developing a model that has the following elements. A risk-neutral manager provides effort to increase the market value of the firm and to favorably influence the market assessment of the manager’s ability. Depending on the magnitude of career concerns, the manager either under- or overinvests effort relative to an efficiency-maximizing level. The analysis identifies conditions un-der which higher-quality reporting induces the manager to invest more effort. Under these condi-tions, the model is extended to a setting in which the manager also chooses the quality of financial reporting at some cost. In doing so, the manager seeks to reduce distortion in their effort invest-ment. The equilibrium reporting quality and effort investment are determined by a trade-off be-tween them. In the presence of high uncertainty about the firm’s future cash flows, if the manager’s career concerns exceed a threshold, the manager underinvests in reporting quality and overinvests effort. The empirical implication is a negative relation between managerial career concerns and fi-nancial reporting quality. To a large extent, this is consistent with findings in prior empirical studies. Thus, the present study offers a theoretical explanation for the empirical findings as an equilibrium outcome.
Keywords: career concerns, financial reporting quality, efficiency
JEL Classification: G14, M41
Suggested Citation: Suggested Citation