Chief Financial Officer Age and the Perverse Effect of Equity Incentives on Financial Misreporting
53 Pages Posted: 20 Oct 2022
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: Suggested Citation