MANAGING EARNINGS FOR MY BOSS? FINANCIAL REPORTING AND THE BALANCE OF POWER BETWEEN CEOS AND CFOS
This paper investigates how the use of earnings management and aggressive financial reporting is related to the balance of power between chief executive officers (CEOs) and chief financial officers (CFOs). I use nationwide awards that recognize CFO excellence as exogenous shocks to the CFO job-market status. I find that, compared to their matched non-awardee counterparts, awardee CFOs experience a sharp increase in career opportunities, total compensation, and stock/option grants, as well as a substantial decrease in CEO power over them. Consistent with the view that shifts in bargaining power between the CEO and CFO matter in earnings management, I find that awardees’ firms have a significantly smaller magnitude of discretionary accruals than both non-awardees and pre-award periods. In addition, winning the award has a substantially negative effect on positive accruals, while the positive effect on negative accruals is less significant. Moreover, the award effects on reducing the magnitude of discretionary accruals are significant only when CFOs face powerful CEOs. I also find evidence that earnings restatements among firms with awardees are less common and receive a less negative market reaction. Overall, my findings suggest that the balance of power between CEOs and CFOs plays an important role in the quality of financial reporting.