Chief Financial Officer Age and the Perverse Effect of Equity Incentives on Financial Misreporting

53 Pages Posted: 20 Oct 2022

See all articles by Jing Fang

Jing Fang

University of Central Arkansas

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Date Written: October 18, 2022

Abstract

We find that the perverse effect of equity incentives on financial misreporting is weaker for older chief financial officers (CFOs) than for younger CFOs. We attribute this to differences in risk preferences associated with age. Consistent with our attribution, we find that the difference is stronger when CFOs have greater discretion over accounting choices. Moreover, results from a difference-in-differences analysis using CFO transitions from younger to older CFOs show that hiring older CFOs alleviates the perverse effect of equity incentives on financial misreporting. In contrast, transitions from older to younger CFOs do not aggravate the perverse effect of equity incentives on financial misreporting. This is consistent with organizational arrangements set up under departing older CFOs constraining incoming younger CFOs from making aggressive accounting choices in response to their equity incentives.

Keywords: equity incentives; risk-taking incentives; financial misreporting; age

JEL Classification: G41, J16, J33, M41, M52

Suggested Citation

Fang, Jing and Myers, Linda A. and Schmardebeck, Roy, Chief Financial Officer Age and the Perverse Effect of Equity Incentives on Financial Misreporting (October 18, 2022). Available at SSRN: https://ssrn.com/abstract=4251683 or http://dx.doi.org/10.2139/ssrn.4251683

Jing Fang

University of Central Arkansas ( email )

College of Business
201 Donaghey Ave
Conway, AR N/A 72035
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Roy Schmardebeck (Contact Author)

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN 37996
United States

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