Research in Accounting Regulation 25 (2013) 88–100

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Research in Accounting Regulation

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Research Report

CEO/CFO characteristics and financial reporting quality: A review

Ahsan Habib a,⇑, Mahmud Hossain b,1
a
School of Business and Law, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand
b
School of Accounting (Building 407, Room 411C), Curtin University, GPO Box U1987, Perth, WA 6845, Australia

a r t i c l e i n f o a b s t r a c t

Article history: This study reviews the literature on the association between different facets of CEO/CFO
Available online 12 December 2012 characteristics and the properties of accounting information. The review is organized
around three broad themes, namely, the association between financial reporting quality
Keywords: and CEO/CFO turnover, the effect of managerial overconfidence on financial reporting out-
Corporate governance comes, and finally the effect of CEO/CFO gender on reporting outcomes. This review illus-
CEO overconfidence trates the importance of considering CEO/CFO characteristics as an important determinant
CEO gender
of financial reporting outcomes. This study offers insights to policy makers interested in
Financial reporting quality
enhancing the governance function to enhance the credibility of financial reporting. The
review informs regulators that designing governance structure disregarding CEO/CFO char-
acteristics may not bring desired benefits.
Ó 2012 Elsevier Ltd. All rights reserved.

Introduction much lower than the variation explained by the industry

A key question in leadership research is whether chief
executive officer (CEO) matters. Proponents of the ‘CEOs
matter’ hypothesis argue that top leaders headed by the
CEO formulate a collective purpose that unites participants
in an organization and decide on the organization’s course
of action in the face of rapid technological and environ-
mental changes (Mackey, 2008). Opponents of this view,
in contrast, argue that CEOs are so constrained by their
environment that they have little ability to affect company
performance. For instance, a company’s culture, the struc-
ture of its industry, and its fixed assets are all constraining
factors that reduce the CEOs ability to take actions that will
have an impact on the company (Wasserman, Nohria, &
Anand, 2010, chap. 2). Early research on the CEO effect
attributed firm performance to firm and industry effects
rather than to the CEO effect. For example, Lieberson and
O’Connor (1972) find that the CEO effect explains only
about 6.5% to 14.5% of the variation in firm performance,
⇑ Corresponding author. Tel.: +64 9 921 9999.
E-mail addresses: ahsan.habib@aut.ac.nz (A. Habib),
Hossain@curtin.edu.au (M. Hossain).
1
Tel.: +61 8 9266 7742.
and firm effects. However, Wasserman et al. (2010, chap.
2) find that the CEO impact differs markedly by industry
and that CEOs have the most significant impact where
opportunities are scarce or where CEOs have slack re-
sources. Mackey (2008) provides robust evidence in sup-
port of the ‘CEO matters’ hypothesis by documenting a
much stronger CEO impact at the corporate level. Given
that these studies employ an accounting performance
measure to gauge the CEO effect, CEOs have strong reasons
to take a keen interest in accounting information.
CEOs are appointed with the expectation that they will
take sensible management decisions to maximize share-
holder value (Armstrong, Guay, & Weber, 2010). The infor-
mation in financial statements allows outsiders to gauge
how efficient the CEO is in fulfilling such an expectation.
Boards of directors consider operating performance to be
one of the most critical factors in deciding whether to ter-
minate the employment of poorly performing CEOs, thus
providing incentives for CEOs to report better operating
performance. CEOs also take an interest in accounting
numbers—and profits in particular—because their compen-
sation incentives are closely tied to reported earnings.
Mahmud.
Beginning with the seminal study of Healy (1985), a sizable
volume of academic research has provided strong evidence

1052-0457/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.racreg.2012.11.002
 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
of earnings manipulation by CEOs whose compensation is
tied to earnings and stock options (Dechow, Ge, & Schrand,
2010). Although CEOs are not directly involved in the prep-
aration of financial statements, research shows that CEOs
put pressure on chief financial officers (CFOs) to engage
in material accounting manipulation to meet or beat mar-
ket expectations (Mei, Ge, Luo, & Shevlin, 2011). This re-
view, therefore, considers both the CEO and CFO
characteristics and their impact on financial reporting
quality.
This focus on short-termism led to a spate of corporate
collapses experienced by the corporate America in
the beginning of this millennium. The passage of the
Srabanes-Oxley (SOX) Act (2002) responds to such a crisis
by making top management more accountable for their ac-
tions. Section 302 under the act, requires upper manage-
ment not only to certify its company’s financial reports,
but also to take responsibility for any erroneous or mis-
leading statements within them. Such a regulatory pre-
scription will allow an efficient managerial labor market
to punish the culpable managers. We begin by reviewing
the strand of literature that examines the efficiency of
managerial labor market in terms of disciplining managers
who deliver low quality financial reports.
While these reforms may be desirable from a market
perspective, their efficacies are unlikely to be realized un-
less the roles of management, particularly CEO characteris-
tics in corporate governance are considered (Carcello,
Hermanson, & Ye, 2011). Academic research (e.g., Skala,
2008) indicates that CEO behavioral characteristics such
as overconfidence and gender play an important role in
corporate policy decisions such as financing, dividends
and corporate governance. Overconfident managers have
been found to issue more optimistic management fore-
casts, engage in income-increasing earnings management,
and become involved in fraudulent activities (Hribar &
Yang, 2010; Schrand & Zechman, 2012). The accumulated
findings from the overconfidence research indicate that
overconfident CEOs are undesirable. However, overconfi-
dent CEOs are also found to be better innovators. CEO
overconfidence is associated with riskier projects, greater
investment in innovation, and greater innovation as. These
contrasting effects of CEO overconfidence reiterate the
importance of considering CEO characteristics in gover-
nance regulation.
A related but much more visible characteristic of CEOs
hypothesized to influence managerial reporting behavior
is CEO gender. Ethical differences between the genders
have been widely examined in the business ethics litera-
ture. This stream of literature suggests that women and
men exhibit distinctly different values and interests and
vary in their inclination to engage in unethical business
behavior (Betz, O’Connell, & Shepard, 1989; Gilligan,
1982). Men are interested in economic benefits and a suc-
cessful career, and are more likely to break rules to achieve
competitive success, whereas women lean towards harmo-
nious relationships and helping others, and are less likely
to be unethical (Betz, O’Connell, & Shepard, 1989; Butz &
Lewis, 1996; Mason & Mudrack, 1996). CEO and CFO gen-
der differences therefore provide an interesting basis for
89
examining the effect of gender on financial reporting
quality.
We extend two recent review studies published in Jour-
nal of Accounting and Economics on financial reporting qual-
ity. Dechow et al. (2010) reviewed a vast body of ‘earnings
quality’ research and the role of ‘firm fundamentals’ in
determining the cross-sectional variation in earnings qual-
ity. Our paper does not follow that path. Although we re-
view research associated with ‘financial reporting
quality’, we focus on the role of CEO/CFO characteristics
(e.g., managerial overconfidence, managerial talent, gen-
der). To the best of our knowledge, no review has yet been
done on this association. Armstrong et al. (2010) is the
other review paper that argues that the lack of information
transparency (arising from information asymmetry) be-
tween managers and outside directors adversely affects
the corporate board structure. We argue that information
asymmetry, between managers and outside directors,
could also arise from CEO characteristics, e.g., behavioral
bias (derives from self disposition bias) and gender. This
emerging literature was not reviewed by Armstrong et al.
(2010). Therefore, our study sheds new light on the role
of CEO in the information environment between insiders
and outside directors. We also believe that our review will
assist the future researchers to understand the role of man-
agement in accounting and governance since the extant
studies do not incorporate the role of management in
accounting, auditing and governance studies (Carcello,
Hermanson, et al., 2011).
We proceed as follows. ‘Financial reporting quality and
CEO/CFO turnover’ reviews empirical research that exam-
ines whether the managerial labor market is efficient in
penalizing culpable managers for financial reporting
manipulation. ‘Managerial characteristics and their impact
on the properties of accounting information’ reviews
emerging research on the impact of managerial overconfi-
dence on financial reporting properties such as the issu-
ance and accuracy of management earnings forecasts and
managerial proclivity to engage in fraudulent activities.
‘CEO/CFO gender and variations in financial reporting qual-
ity’ reviews CEO/CFO gender-based empirical research. The
final section of the paper discusses the implications of the
studies reviewed herein and presents our conclusions.
Financial reporting quality and CEO/CFO turnover
In an agency theory framework, managers act as agents
of the shareholders (principals) and are expected to utilize
shareholders’ funds in the most efficient way possible.
However, not all managers are competent to do so, and
the existence of an efficient managerial labor market en-
sures that poor performers are punished. The threat of ter-
mination can give managers an incentive to be cognizant of
the shareholder value maximization ethos. Turnover can
also facilitate a better match between firms and CEOs
based on certain characteristic such as CEO leadership
qualities, risk preferences, or expertise in the firm’s pro-
duction technology (Gibson, 2003). Much of the early
empirical literature on the association between firm per-
formance and CEO turnover is surveyed by Murphy
90 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
(1999), Hermalin and Weisbach (1998, 2003), and Adams,
Hermalin, and Weisbach (2010). Finkelstein, Hambrick,
and Cannella (2009) provide a more up-to-date review
on the determinants and consequences of CEO turnover
decisions. Their survey, however, is undertaken from a
strategy and leadership change perspective, whereas we
review CEO turnover research from a financial reporting
quality perspective.
Financial reporting quality and CEO/CFO turnover
A number of studies document significant negative la-
bor market consequences for individuals at firms with
low earnings quality. These studies use restatements, mis-
statements or auditor resignations to measure earnings
quality, all of which are highly transparent indicators of
poor quality earnings. Desai, Hogan, and Wilkins (2006)
find that CEO turnover increases after the announcement
of an earnings restatement, a finding consistent with the
efficient managerial labor market hypothesis. This hypoth-
esis predicts that if the managerial labor market is efficient
in disciplining managers by making it difficult for replaced
managers to find comparable employment, then such an ex
post settlement would discourage managers from engaging
in financial reporting manipulation.
Arthaud-Day, Certo, Dalton, and Dalton (2006) also find
that CEOs of firms filing a material financial restatement
are more than twice as likely to exit their firms as their
counterparts in a matched sample. Although this evidence
is consistent with that adduced by Desai et al. (2006), the
theoretical frameworks used to develop hypotheses in
the two studies differ significantly from one another.
Arthaud-Day et al. (2006) argue that a material financial
restatement gives rise to a legitimacy concern for the orga-
nization (both regulatory and normative legitimacy) and
show firms tend to respond to such a legitimacy crisis by
removing their CEO. Land (2010) considers the characteris-
tics of restatements, rather than the restatement per se,
and documents that the severity of the restatement, as
proxied by its magnitude and duration, is positively associ-
ated with CEO turnover. The study also shows that auditor-
initiated and revenue-related restatements are likely to
trigger a CEO turnover decision. Hennes, Leone, and Miller
(2008) argue that the failure to distinguish between
irregularity (intentional misstatements) and error (unin-
tentional misstatements) components of earnings restate-
ments leads to erroneous inferences. They document that
the probability of CEO turnover is much higher for
restatements classified as irregularities than for those
classed as errors. However, they do not find that either
the magnitude of the restatement or revenue-related
restatements have any impact on CEO turnover decisions,
findings inconsistent with those of Land (2010).
Karpoff, Lee, and Martin (2008) provide convincing evi-
dence that almost all culpable managers lose their job. This
finding is stronger for companies with an independent
board of directors and larger outside blockholder share-
holdings. Menon and Williams (2008) find evidence that
CEO turnover increases following resignation of the incum-
bent auditor. Auditor resignations provide directors with a
stronger justification for replacing the CEO as they are
likely to signal managerial inability to attend to reporting
problems raised by the auditor. Feng, Ge, Luo, and Shevlin
(2011) find that about 60% of the CFOs in the manipulating
firms are charged by SEC, and the charged CFOs face vari-
ous kinds of penalties including future employment
restrictions. Niehaus and Roth (1999) observe an increase
in managerial turnover in firms that settle class action law-
suits for financial reporting reasons.
In a contrasting result, Agrawal, Jaffe, and Karpoff
(1999) report no difference in the incidence of CEO turn-
over in a sample of 103 firms that engaged in financial
reporting fraud. This finding is surprising, as fraud revela-
tions reduce firm value and warrant the punishment of
culpable managers. Replacing culpable managers can also
limit the firm’s exposure to liability because fraud revela-
tions are most likely to increase the firm’s exposure to legal
liability costs. There may, however, be valid reasons for the
lack of an association between fraud and CEO turnover, as
explained by Agrawal and Cooper (2009, p. 4):
First, the cost of replacing a fired manager’s accumu-
lated firm-specific human capital may be prohibitive.
Second, the level of internal controls needed to elimi-
nate any possibility of accounting problems may be
sub-optimal for a firm. Because the direct and indirect
costs (such as lost business) of such controls may be
prohibitive, the revelation of accounting problems
may not prompt the board to change managers. . ..
Third, while restatements generally are bad news for
firms, some restating firms may not lose significant rep-
utational capital. In such cases, the net benefits from
replacing managers can be small. Finally, a firm’s inter-
nal governance mechanisms may not be strong enough
to prompt management turnover. . ..
Similarly, Beneish (1999) documents that the firms sub-
ject to SEC enforcement actions for earnings overstate-
ments do not experience any noticeable increase in CEO
turnover compared to their non-violation sub-sample.
Persons (2006), too, finds fraud revelations to have no sig-
nificant impact on CEO turnover. However, there is a pau-
city of research showing whether it is poor quality itself or
fear of the perception of poor quality that motivates a
board’s turnover decision. In addition, these earnings
quality proxies capture extreme cases of poor earnings
quality and do not answer the question of whether CEOs
are fired for manipulating earnings within Generally
Accepted Accounting Principles (GAAP) (which is less
transparent or observable) (Dechow et al., 2010).
Moreover, there is no consensus on what represents ideal
financial reporting quality. Studies that use restatements
or fraudulent activities as the managerial misrepresenta-
tion construct have more validity than those that use
conventional earnings management proxies, i.e., measures
of abnormal accruals.
CEOs job security concerns and the properties of accounting
information
Fundenberg and Tirole (1995) assume that manage-
ment derives incumbency rents from continuing in the
firm. Management can minimize the probability of being
 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100 91

fired by developing a smooth performance record because
the decision to fire or retain depends more on current per-
formance than on past performance. DeFond and Park
(1997) indirectly test the theory proposed by Fundenberg
and Tirole (1995) and provide evidence that managers of
firms experiencing poor (good) performance in the current
period and for which performance is expected to be good
(poor) in the next period deploy income-increasing (in-
come-decreasing) discretionary accruals (DACCR) in the
current reporting period to alleviate job security concerns.
Ahmed, Zhou, and Lobo (2011) further refine the thesis of
DeFond and Park (1997) by using three proxies for job
security: competition, product durability, and revenue vol-
atility. They present evidence that managers of firms oper-
ating in competitive industries, in durable goods
industries, and in more uncertain operating environments
(proxied by revenue volatility) employ significantly more
negative discretionary accruals when current performance
is good and future performance is expected to be poor. Fur-
thermore, managers of firms operating in durable goods
industries and in more uncertain operating environments
employ positive DACCR when current performance is poor
and future performance is expected to be good. Both these
sets of findings support the hypothesis that income is
smoothed in the presence of managerial job security con-
cerns. Their study, however, uses DACCR as an income-
smoothing proxy, as opposed to a variation of income-
based approach. Furthermore, the extent to which these
three proxies are good measures of job security is a
concern.
Demers and Wang (2010) consider the career concern
model developed by Holmstrom (1999) to investigate
managerial incentives for earnings management and the
relative trade-off between accruals and real earnings man-
agement. The Holmstrom model predicts that younger
managers are more concerned about their career because

Table 1
Financial reporting quality and CEO turnover.

Authors (year) Contextual Measurement Impact on CEO turnover

variables
Financial reporting quality and CEO turnover
Desai et al. (2006) Financial A dummy variable coded 1 if the sample firm is a
restatements restatement firm and 0 otherwise
Arthaud-Day et al. Financial The authors use the General Accounting Office (GAO)
(2006) restatements definition of accounting irregularities, which includes
aggressive accounting practices, intentional and
unintentional misuse of facts, misinterpretation or
oversight of accounting rules, and fraud.
Restatements involving any form of accounting
irregularity were included in the database regardless
of the magnitude of their financial impact on the firm
Persons (2006) Fraud The fraud revelation includes financial
revelation reportingfraud, insurance fraud, bank fraud,
securities fraud,and fraudulent billings of
government contracts
Karpoff et al. Size of the Reflects the cost imposed on outside shareholders by
(2008) harm financial misrepresentation. Size of the harm is
proxied by ‘‘provable loss,’’ which equals the% change
in the firm’s market capitalization from its highest
point during the violation period to the first day news
of a possible violation is revealed
Hennes et al. Earnings IRREGULARITY: is coded 1 if the restatement
(2008) restatements announcement explicitly refers to an irregularity
(intentional misrepresentation as opposed to error)
as the reason for the restatement or discloses either
an SEC investigation or an independent board
investigation, and 0 otherwise
Land (2010) Characteristics Severity of restatement (absolute value of amount of
of earnings net income restated divided by total
restatements assets);Duration: number of quarters of restatement
Audcause: 1 for auditor initiated restatement and 0
otherwise
Revr: 1 for revenue-related restatements and 0
otherwise
CEO career concerns and financial reporting outcomes
Ahmed et al. Career concern Three proxies for job security concern: competition,
(2011) product durability, and revenue volatility
Demers and Wang CEO career A continuous measure of CEO age to proxy for CEO
(2010) stage career stage and hence their reporting decisions
CEO turnover probability is higher for firms with
earnings restatement (coefficient on RESTATE is 1.03,
p-value 0.01)
Restatement firms experience a significantly higher
level of CEO turnover (coefficient on RESTATEMENT is
2.35, p-value 0.01). The hazard ratio of 2.35 implies
that CEOs of restatement firms are more than twice
as likely as their counterparts in control firms to
experience replacement
Fraud revelation does not have any significant effect
on CEO turnover (coefficient on FRAUD is 0.26, p-
value 0.35, Table 6)
Managers’ likelihood of job loss increases with the
size of the provable loss. In addition, the likelihood of
removal is positively related to the board’s
independence and the holdings of outside
blockholders (coefficient on provable loss is 2.51, p-
value 0.09)
CEO turnover probability is much higher for
restatements classified as irregularities as opposed to
errors (coefficient on IRREGULARITY is 2.68, p-value
0.001, Table 5)
Severity of restatement and duration of restatements
are positively associated with CEO turnover.
Moreover, auditor initiated and revenue related
restatements are likely to trigger a CEO turnover
decision (coefficient on SEVERITY is 2.80, p-value
0.014, coefficient on DURATION is 0.83, p-value 0.001)
Managers of firms operating in competitive
industries, in durable goods industries, and in more
uncertain operating environments employ
significantly more negative DACCR when current
performance is high but future performance is low
Young (mature) CEOs are less (more) inclined to
manage earnings considering their post-retirement
labor market value
92 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
the market is still in the process of assessing their talent.
Demers and Wang (2010), in contrast, find the opposite
and argue that the reversal nature of the accrual account-
ing system provides a rationale for this rather surprising
observation. They formalize this observation as follows
(p. 5).
Younger managers only receive a fraction of the benefit
of the first period’s managed accruals in their second
period wage because some of the accruals-induced
above-expectations performance is attributed to noise
or luck. In contrast, the manager’s future wage is penal-
ized for the full amount of the accruals reversal in the
second period. Thus. . .the manager’s utility is maxi-
mized by taking zero income-increasing discretionary
accruals in the first period, when she is still young.
For established managers, however, since income-
increasing accruals do not reverse during the period of
their tenure as CEO, the equilibrium outcome is that
the older managers would manage earnings up in order
to influence their post-retirement value as a director.
Empirical research on CEOs career concerns focuses al-
most exclusively on earnings management practices. More
promising insights can be developed by assessing the effect
of CEOs career concerns on other reporting outcomes such
as voluntary disclosure strategies including management
earnings forecasts and analyst forecast guidance strategies.
Table 1 summarizes academic research on the effect of
financial reporting quality on the probability of CEO
turnover.
Section summary: Taken together the literature on the
effect of financial reporting quality on the probability of
CEO turnover provides some mixed evidence of the effi-
ciency of managerial labor market. Further research is war-
ranted on this as managerial labor market should play an
active external governance role to curb managerial oppor-
tunism. Specifically, future research should look into
whether managerial labor market complements or substi-
tutes internal governance mechanisms with respect to
financial reporting quality.
Managerial characteristics and their impact on the
properties of accounting information
Success is a lousy teacher. It seduces smart people into
thinking they can’t lose. (Bill Gates, founder and CEO of
Microsoft)
High expectations are the key to everything. (Sam Wal-
ton, founder and CEO of Wal-Mart)
How do the psychological traits of individual managers
affect their decision-making style and consequently influ-
ence financial reporting outcomes? From a theoretical per-
spective, the upper echelons theory propounded by
Hambrick and Mason (1984) suggests that top managers’
individual characteristics affect their decision-making
style. One such interesting managerial attribute is ‘over-
confidence’. We now turn to a review of the concept of
managerial overconfidence and its impact on financial
reporting decisions.
Concept of overconfidence
The term ‘overconfidence’ has been widely used in the
psychology literature since 1960. The disciplines of eco-
nomics and finance then started to apply this concept to
explain seemingly irrational behavior in the 1990s and
early 2000s, respectively. From a psychology perspective,
overconfidence
. . . is most closely related to the calibration and proba-
bility judgment research and the term itself is fre-
quently equaled with one of the forms of
miscalibration. The most important extensions to this
definition. . .are studies of overconfidence in the context
of positive illusions, i.e. the better-than-average effect,
illusion of control and unrealistic optimism (Skala,
2008).
Overconfidence—the psychological trait of interest for
our review—may be defined as the behavioral bias of hav-
ing unrealistic (positive) beliefs about any aspect of the
distribution of an uncertain outcome (e.g., future cash
flows) such that the mean is overstated (Skala, 2008).
Overconfident individuals exhibit self-attribution bias,
i.e., they take too much credit by attributing success to
their own ability, while they attribute failures to bad luck
(Gervais & Odean, 2001). In a corporate setting, managers
who successfully climb the corporate ladder to become
CEOs are also likely to become overconfident (Goel & Tha-
kor, 2008) The overconfidence concept also encompasses
positive illusions including (i) the better-than-average ef-
fect; (ii) unrealistic optimism; and (iii) the illusion of con-
trol. Skala (2008, pp. 38–41) provides a detailed
description of these three overconfidence constructs. The
better-than average effect describes whether and to what
extent people feel superior to their peers. Unrealistic opti-
mism towards the future can be conceived of as a psycho-
logical bias to make errors in evaluating future events.
People are found to believe that positive events are more
likely to happen to them than to others, with the opposite
applying to negative events (Weinstein, 1980). The illusion
of control effect is manifested in people’s strong belief that
they are able to influence events actually governed mainly,
or even purely, by chance.
Managerial overconfidence may lead to distortions in
corporate investment decisions (Huang, Jiang, Liu, & Zhang,
2011; Lin, Hu, & Chen, 2005; Malmendier & Tate, 2005), re-
sult in value-destroying mergers (Malmendier & Tate,
2008), and lead to lower dividend payouts (Deshmuk, Goel,
& Howe, 2009). Despite the behavioral distortions associ-
ated with managerial overconfidence, overconfident man-
ager has the highest probability of being promoted to
CEO (Goel et al., 2008) but ironically, overconfident
managers are more likely to be terminated compared to
their not-so-confident counterparts (Campbell, Johnson,
Rutherford, & Stanley, 2009; Choi, Ferris, Jayaraman, &
Sabherwal, 2010).
Managerial overconfidence and financial reporting
The concept of managerial overconfidence has recently
entered the accounting research domain. Hribar and Yang
 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
(2010) document that overconfident managers make more
income-increasing accruals choices and tend to issue more
optimistic forecasts requiring them to manage earnings to
achieve earnings expectation benchmarks. Luo (2010) ex-
plores the dynamism in management forecasting by con-
sidering the differential response to feedback among
overconfident and not so confident managers. Managers is-
sue forecasts and receive feedback on such forecasts in the
form of error (forecast error) and market (market reaction
to forecast release) feedback. The former is precise and ver-
ifiable, and the causal link between forecast error and
managers’ prior decisions is well understood. Market feed-
back, in contrast, is noisy as many other factors could also
confound the market reaction to forecast surprises. Follow-
ing attribution theory, Luo documents that overconfident
managers respond promptly to forecasting errors, but re-
spond slowly to market feedback to correct forecasting
bias. Hillery and Hsu (2011) test overconfidence theory
by examining whether recent success in making accurate
forecasts (for the last four quarters) leads to managerial
overconfidence in predicting future earnings. They find
that such overconfident managers become less accurate
in forecasting earnings for subsequent quarters. Schrand
and Zechman (2012) document that overconfident manag-
ers engage in fraudulent activities. This finding is premised
on the observation that overconfident managers underesti-
mate the necessity of managing earnings in future periods,
which will put them in a precarious position in meeting
forecasts for the future. Habib, Sun, Cahan, and Hossain
(2012) examine the impact of managerial overconfidence
on earnings management strategies and whether this rela-
tion changed during the global financial crisis. The authors
find evidence that overconfident managers use real earn-
ings management strategies to manipulate earnings more
than less confident managers. They also find some evi-
dence that overconfident managers use less accruals earn-
ings management than other managers. Finally, evidence
reveals that overconfident managers reduced accruals
earnings management during the crisis period by a greater
amount than less confident managers. Ge, Matsumoto, and
Zhang (2011) explore the effect of two individual observa-
ble characteristics of CFO, risk attitudes and confidence, on
financial reporting quality. However, they find only limited
evidence of the impact of these observable CFO character-
istics on CFOs’ reporting choices.
One of the major shortcomings of the growing literature
on the association between managerial overconfidence and
financial reporting outcomes is a lack of a reliable measure
of managerial overconfidence. Some of the proxy variables
used to represent managerial overconfidence is summa-
rized in Table 2.
Managerial ability, managerial reputation and financial
reporting quality
Trueman (1986) argues that talented managers have an
incentive to make voluntary earnings forecasts to signal
their ability because, ‘‘. . .the firm’s market value at the
end of any period will be a function of investors’ percep-
tions of [managers’] ability to anticipate future changes
in the firm’s economic environment and adjust the firm’s
93
production plan accordingly. While this ability cannot be
directly observed by investors, the manager can provide
some information about it by releasing an updated earn-
ings forecast each period when and if the manager ob-
serves any changes that period in the firm’s economic
condition’’ (p. 54).
Formulating an accurate measure of managerial talent
is challenging. The most widely used proxy for talent has
been the media attention received by the CEO in question.
Demerjian, Lev, and McVay (2012) adopt an alternative ap-
proach in which they quantify managerial ability using a
data enveloping technique. The most salient aspect of this
measure is that the publicly available information in finan-
cial statements makes it suitable for the comprehensive
examination of managerial talent. In a follow-up study,
Demerjian, Lewis, Lev, and McVay (2010) investigate the
effect of managerial talent on financial reporting quality
finding a positive association between the two. Baik,
Farber, and Lee (2011) document that the likelihood and
frequency of management earnings forecasts are positively
associated with managerial talent. They also show that
management earnings forecast accuracy is higher and the
market reaction to earnings forecasts is greater for firms
with more talented managers. These findings lend support
to the hypothesis that an able CEO increases the credibility
of management earnings forecasts. Malmandier and Tate
(2009) examine the effect of CEOs achieving superstar sta-
tus on firm performance, using prestigious business
awards to measure superstar CEOs. Award-winning CEOs
(i) underperform in subsequent periods; (ii) extract more
compensation; (iii) spend more time on public and private
activities outside their company, and (iv) engage in in-
creased earnings management.
Francis, Huang, Rajgopal, and Zang (2008) consider the
effect of CEO reputation on earnings quality using efficient
contracting, rent extraction, and matching hypotheses,
finding support for the latter. Efficient contracting suggests
a positive association between CEO reputation and earn-
ings quality because CEOs with a significant reputation at
stake are less likely to jeopardize their reputation by
manipulating accounting information. Rent extraction the-
ory, on the other hand, suggests the opposite. An important
consideration in examining the association between CEO
characteristics (including overconfident CEOs) and earn-
ings quality is endogeneity. CEOs are not randomly as-
signed to firms; rather, they are chosen to match the
characteristics of the company. For example, boards of
directors of firms with poor quality earnings (perhaps
due to a volatile operating environment) may choose a rep-
utable CEO to alleviate this problem.
CEO power in the board selection process
It is debatable whether CEOs should be involved in the
board selection process. The agency theory view prescribes
that CEOs should not be involved in the selection process if
they are to remain independent. CEO involvement in the
director selection process leads to higher CEO compensa-
tion and perquisites (Wade, O’Reilly, & Chandratat, 1990;
Westphal & Zajac, 1995). There is, however, no research
informing us about interactive relationships among CEO
94 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100

Table 2
Proxy variables used to operationalize different managerial characteristics.

Constructs Authors (year) Proxies used Findings

Overconfidence Campbell et al. (2009)  Managerial overconfidence following CEO net pur- Excessively overconfident managers are
chase of stock more like to be fired than their not so
 Overconfidence using the industry-adjusted invest- overconfident managers
ment rate (CAPEX/Net PPEt-1)
 A modified stock option exercise-based overconfi-
dence proxy
Schrand and Zechman  PHOTOSCORE = four points if the CEOs photo in the Overconfident managers engage in
(2012) annual report includes no other individuals and is fraudulent financial reporting
equal to at least one half page in size; three points
if the CEOs photo includes no other individuals and
is less than one half page in size; two points if there
are other individuals pictured with the CEO; and one
point if there is no photograph of the CEO
 REL_CASHCOMP = the ratio of salary plus bonus for
the CEO to that of the second-highest paid executive
 REL_NONCASH = the ratio of non-cash compensation
for the CEO to that of the second-highest paid
executive
Luo (2010)  A management earnings forecast-based overconfi-
dence proxy
CEO involvement Carcello Neal, CEO involvement occurs when: CEO involvement in the board selection
in the board Palmrose, and Scholz (i) The firm has a nominating committee (NC) and process reduces AC effectiveness when
selection (2011) the CEO is on the committee earnings restatement is the outcome
process (ii) The firm does not have a NC, but the proxy state- measure
ment indicates that the entire BOD is responsible
for the director selection process
(iii) The firm does not maintain a NC, but the proxy
statement indicates that ‘management is
involved’ in the director selection process
Callahan et al. (2003) A composite index is developed using principal Management involvement in the board
component analysis of ten (10) corporate governance selection process is positively associated
variables including the presence of a NC. Some of the with firm performance measured by the
other governance variables considered include NC industry-adjusted Tobin’s Q ratio
meetings, board size, a staggered board, and interlocking
directorships
Hwang and Kim CEO-board social ties: A director is considered socially Within the subsample of firms with
(2009) dependent on the CEO if the director and the CEO have conventionally independent boards, CEOs
two or more of the following in common: (i) served in the whose boards are not socially independent
military; (ii) graduated from the same university (and exhibit a lower sensitivity of turnover to
were born no more than three years apart); (iii) born in performance. This implies that social ties
the same US region or the same non-US country; (iv) between the CEO and directors breed
have the same academic discipline; (v) have the same entrenchment
industry of primary employment; or (vi) share a third-
party connection through another director on whom
each is directly dependent
Managerial Demerjian et al. Employ a data optimization procedure based on data The well-documented negative relation
talent (2012) envelope analysis (DEA). Seven input variables between equity financing and future
categorized into five stock and two flow variables are abnormal returns is mitigated by
used. The stock variables are net PP&E, net operating managerial ability, as more able managers
leases, net R&D, purchased goodwill, and intangible appear to utilize equity issuance proceeds
assets, all measured at the beginning of year t. The two more effectively
flow variables are the cost of inventory and SG&A
expenses, measured over year t. These seven inputs to a
large degree capture the choices managers make in
generating revenue
Baik et al. (2011) Three measures of managerial talent: All three proxies of managerial talent are
(i) Press citations: log of the number of news arti- positively associated with the magnitude,
cles citing the firm’s CEO over the past 5 years frequency, and accuracy of management
(ii) Demerjian et al.’s (2012) DEA-based talent earnings forecasts and with the market
measure reaction to such forecasts
(iii) Industry-adjusted return-on-assets

involvement, CEO compensation, and future firm perfor- boards that are conventionally independent but not so-
mance (pay-performance sensitivity). cially independent. Moreover, turnover is less sensitive to
Hwang and Kim (2009) show that the probability of poor firm performance in firms with a conventionally inde-
turnover decreases by an average of 3.7% for firms with pendent but not socially independent board. Strong social
 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
ties between CEOs and directors therefore help CEOs retain
their job despite poor performance. Krishnan, Raman,
Yang, and Yu (2011) examine the effect of social ties be-
tween the CFO/CEO and members of the board of directors
on earnings management by the firm.2 They document a
positive association between the CFO/CEO and board-level
social ties and earnings management in both the pre- and
post-SOX time periods. However, there appears to be a
negating effect of social ties on earnings management dur-
ing the post-SOX era.
Carcello, Neal et al. (2011) examine the relationship be-
tween CEO involvement in board selection and the restate-
ment of financial statements. The authors provide some
evidence that CEO involvement in the board selection pro-
cess eliminates the benefits of audit committee monitor-
ing, even when AC members have financial expertise and
are independent. Moreover, the negative market reaction
to earnings restatements is weakened by the presence of
an independent audit committee, but only when the CEO
does not personally select the board members. Callahan,
Millar, and Schulman (2003), in contrast, argue that CEOs
should be involved in the board selection process as they
find that such involvement improves firm performance.
In addition, Klein (1998) finds that insiders are more likely
to sit on a board’s finance committee when the CEO is in-
volved in the director selection process, and also reports
a positive relation between the percentage of insiders on
the finance and investment committees and firm
performance.
Section summary: The research on managerial overconfi-
dence has opened up a promising avenue for understand-
ing managerial accounting policy choice decisions.
Although the exiting literature seems to provide robust
evidence that overconfident managers engage in
value-destroying investment activities and engage in
opportunistic earnings management to conceal negative
consequences, the findings need to be cautiously inter-
preted as the power associated with the measurement of
managerial overconfidence may be low. CEO involvement
in the board selection process also is considered as a sub-
optimal governance choice. Independent board of directors
is considered as a crucial element of the corporate gover-
nance framework and regulations are passed to ensure that
boards comprises with majority of independent directors.
CEO involvement in board selection process is a violation
of this regulatory prescription.
CEO/CFO gender and variations in financial reporting
quality
Gul, Hutchinson, and Lai (2011) provide two reasons for
the inclusion of females on the board. The first is the moral
2 board attendance record of male directors, are more likely
Although from a financial reporting perspective, independence of the
audit committee has received a much stronger regulatory focus rather than
the entire board, Krishnan et al. (2011) argues for examining social ties at
the board level. They reason that, ‘‘. . .the board appoints the audit
committee and is, therefore, well placed to influence the actions of the
audit committee. Consequently, an audit committee that appears to be
strong and competent on paper can be undermined in practice by a
dysfunctional board. Hence, it is important to examine social ties at the
level of the board and not just the audit committee’’ (p. 538).
95
justice case arguing it is the right thing to do, and the sec-
ond is the business case arguing that it enhances share-
holder value. Organizational theory typically indicates
that females on the board are associated with better orga-
nizational outcomes as their inclusion ‘‘improve(s) board
decisions and facilitates tough board decisions that are
considered unpalatable by all male board(s)’’ (Gul et al.,
2011, p. 5). Signaling theory posits that firms use credible
signals to build their reputation in a market with informa-
tion asymmetry. For example, when a market suffers from
severe information asymmetry, firms may voluntarily use
high-quality auditors, retained share ownership (in an
IPO setting), accounting policies, and dividend and debt
policies. Because females on the board improve organiza-
tional performance by facilitating sound board decisions,
their presence signals to external stakeholders (e.g., inves-
tors, financial analysts, media, the general public) that the
firm is a high-quality communicator of financial informa-
tion. Brammer, Millington, and Pavelin (2009) suggest that
‘‘female(s) on (the) board might affect perceptions of cor-
porate effectiveness and therefore would lead to improved
corporate reputation’’. In their search for underlying causes
of the recent global financial crisis, regulators and practi-
tioners have expressed concern about the disproportionate
under-representation of females on boards of directors and
in senior management positions. For example, Baroness
Hogg, Chairman of the Financial Reporting Council (FRC)
of the UK, recently commented as follows: ‘‘The FRC be-
lieves that diversity at the board table can help to make
boards more effective, for example by reducing the risk
of ‘group think’. The change we made to the code last year
has helped to trigger a significant change in attitude to the
persistent failure of companies to appoint more women to
boards, depriving themselves of the benefits of the full tal-
ent pool available to them’’.
Ethical differences between the genders have been
extensively examined in the business ethics literature. This
literature suggests that women and men exhibit distinct
differences in values and interests and in their inclination
to engage in unethical business behavior (Betz, O’Connell,
& Shepard, 1989; Gilligan, 1982). Men are interested in
economic benefits and a successful career, and are more
likely to break rules to achieve competitive success,
whereas women lean more towards harmonious relation-
ships and helping others, and are less likely to be unethical
(Betz, O’Connell, & Shepard, 1989; Butz & Lewis, 1996; Ma-
son & Mudrack, 1996).
Finance researchers have linked gender differences with
the role of the board in corporate governance. Adams and
Ferreira (2009) suggest that gender-diverse boards allocate
more effort to oversight and monitoring. Specifically, they
demonstrate that female directors improve board inputs in
that they have a higher board attendance rate, improve the
to take up monitoring positions on audit, nominating, and
corporate governance committees than to serve on the
compensation committee, and are more likely to hold CEOs
accountable for poor performance. Audit and corporate
governance committees are directly involved in increasing
the transparency and improving the quality and quantity
of useful firm-specific information disseminated to
96 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
investors. The accounting literature shows that practitio-
ners typically regard earnings management as an ethical
issue (Bruns & Merchant, 1990). Accounting research has
also explored the effect of gender differences in earnings
quality and found the latter has a positive relation with fe-
male employees. For instance, Srinidhi, Gul, and Tsui
(2011) and Krishnan and Parson (2008) find that gender
diversity in senior management improves the quality of re-
ported earnings. Shawver, Bancroft, and Sennetti (2006)
also indicate that female accountants are less likely to en-
gage in earnings management.
In an interesting extension of the gender diversity liter-
ature, Gul, Srinidhi, and Ng (2011) examine whether gen-
der-diverse boards of US listed companies encourage the
incorporation of more firm-specific information into stock
prices. Based on the literature, the authors contend that
firms with more gender-diverse boards make more price-
relevant disclosures to investors and improve stock price
informativeness in doing so. They define stock price infor-
mativeness as the ‘‘extent to which firm-specific non-mar-
ket information is reflected in the stock price.’’ Although
their study is the first to test the association of gender
diversity with stock price informativeness, several earlier
organizational behavior studies provide evidence on the
effect of gender diversity on behavioral dynamics in board
meetings and the resulting effectiveness of the board in
implementing better corporate governance (Hambrick,
Werder, & Zajac, 2008; Hillman, Nicholson, & Shropshire,
2008). In sum, this literature suggests that female directors
are more likely to increase the information content of
board discussions by bringing a diverse range of view-
points, a broader perspective, and innovative ideas to
board meetings. Prior studies also indicate that by improv-
ing board informedness and increasing the level of board
oversight and monitoring, female directors create a richer
information environment that is conducive to the dissem-
ination of value-relevant, firm-specific information to
investors.
Financial reporting quality is an important factor in the
efficient allocation of resources through capital markets.
To achieve this objective, Section 302 of the SOX, entitled
‘‘Corporate Responsibility for Financial Reports’’, requires
the CEO and the CFO of publicly traded firms to certify
the appropriateness and fairness of financial reports. This
SOX requirement and the resulting complex environment
have increased the responsibilities of the CFO as the corpo-
rate financial reporting supervisor. Although some studies
examine the effect of CEO gender differences on financial
reporting in the post-SOX period, very little research inves-
tigates the role of CFO gender on financial reporting qual-
ity. The studies of Peni and Vahamaa (2010) and Barua,
Davidson, Rama, and Thiruvadi (2010) are noteworthy
exceptions examining the association between CFO gender
and the quality of accruals—a proxy for financial reporting
quality. Based on prior research findings on gender differ-
ences in a variety of decision settings—risk-taking attitude,
financial judgment, and regulatory compliance—they
hypothesize that firms with female CFOs have higher qual-
ity accruals. Both of these studies find that companies with
female CFOs have lower performance-matched absolute
DACCR accruals and lower absolute accrual estimation
errors after controlling for factors that prior research has
shown to be associated with accruals.
With the financial reporting oversight responsibilities
of the CFO having increased under SOX, CFOs with financial
expertise (e.g., professional certification and financial
background and experience) are likely to improve earnings
quality through better judgment and help CFOs to produce
more accurate accounting estimates (McNichols, 2002, p.
61), thus reducing the level of noise in earnings because
earnings numbers are a product of estimates involving
judgment. To rule out this alternative explanation, Barua
et al. (2010) obtained data about CFO certification (CPA
or not), education (MBA or not), and experience (tenure
as CFO) and included these three variables in their accruals
regressions. Their results remained unchanged, with the
main variable of interest FEMALECFO remaining negative
and significant in every regression including professional
and demographic variables.
Ye, Zhang, and Rezaee (2010) ask the following ques-
tions. Does the stated gender effect on earnings quality in
developed countries also hold in developing countries?
Do firms in emerging markets with female top executives
also report higher quality earnings? They provide answers
to these questions by investigating the possible association
between top executive gender and earnings quality in
China, the largest emerging market in the world. Unlike
findings documented in developed markets such as the
US their results indicate that earnings quality proxies the
accuracy of current earnings—including earnings persis-
tence—in forecasting future cash flows, and that the asso-
ciation between (i) earnings and stock returns; and (ii)
the absolute magnitude of DACCR is not significantly dif-
ferent between firms with female top executives and those
with male top executives. Their study is the first to exam-
ine the relationship between gender and earnings quality
in an emerging market such as China and offers managerial
and policy implications.
Section summary: In this section, we review and synthe-
size an emerging strand of literature on the role of gender
diversity in the quality of financial accounting information.
In their pursuit of board reforms in continental European
countries, regulators have proposed making the appoint-
ment of female directors a legal requirement. Empirical
studies have found that female representation on the
board of directors has increased in US firms over time.3
The rationale behind such board reforms is that gender
diversity improves board oversight of corporate activities.
This push for reform in the makeup of the board has
prompted academic researchers to investigate the effect of
gender on various corporate policy decision-making areas
including corporate financial reporting (i.e., earnings man-
agement), auditing, and capital structure. Most of the empir-
ical studies reviewed in this section show evidence
3
The number of women holding Fortune 500 board seats in the US grew
from 9.6% in 1995 to 15.2% in 2009, according to research firm Catalyst.
However, as the author explains, most US boards of directors still fail to
meet European-style gender quotas. Norway, for example, has a 40%
requirement for women on boards, and France, Iceland, Spain, and the
Netherlands have followed suit with similar quotas. However, nearly half of
all FTSE 250 companies in the UK do not have a woman in the boardroom.
 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
supporting the argument that gender diversity improves
board effectiveness. Future research could investigate
whether gender diversity on the board complements or acts
as a substitute for aspects of external governance such as
institutional ownership. Research could also investigate
whether auditor choice, earnings restatements, and the dis-
closure of bad news through management forecasts differ
across firms due to gender differences in corporate manage-
ment structure.
Implications and conclusions
As they are the leaders of their organizations, CEOs have
attracted a great deal of research attention and regulatory
focus. The Berle and Means (1932)-type modern day orga-
nization requires a professional and competent CEO and a
top management team to run the organization in a way
that maximizes shareholder value. Considerable research
attention has been paid to the extent to which CEOs actu-
ally matter. Early evidence suggested that firm and indus-
try effects are more important than the CEO effect.
Population ecologists in particular have argued that CEOs
are constrained by a number of factors limiting managerial
actions such as fixed investment in specialized assets,
internal political constraints, restricted information flows,
and an ingrained culture (Hannan & Freeman, 1977). How-
ever, growing evidence that CEOs do matter has put their
actions under greater scrutiny.
Implications of CEO turnover research
The CEO turnover literature has profound implications
for corporate governance regulation because the timely
termination of CEOs by the board of directors assures
stakeholders of the value creation role of governance
mechanisms. One of the more robust pieces of evidence
in the CEO literature is the finding that CEO turnovers are
preceded by both poor accounting performance and poor
stock market performance. Reliance on accounting data
can be explained by the fact that the stock price incorpo-
rates the market’s expectations of the future, including va-
lue implications of the potential appointment of a new
CEO, leaving accounting earnings as a cleaner signal of
the current CEOs talent than is the stock price (Hermalin
& Weisbach, 1998; Weisbach, 1988). This reliance on
accounting information raises some interesting questions.
From the board of directors’ perspective, how should it
weigh the relative importance of accounting performance
and stock returns? Given that accounting information is
subject to manipulation because of the discretion afforded
by GAAP, how should the board eliminate the managed
component of earnings to infer the true measure of perfor-
mance? In the case of stock returns, the board needs to de-
cide how much of the stock return is attributable to the
CEOs effort and hence whether it is a useful input in any
turnover decision. From the CEO perspective, should they
not attempt to manipulate earnings numbers through dif-
ferent earnings management techniques given the strong
evidence that poor performance precedes CEO turnover?
Dechow and Sloan (1991) provide early evidence on this
97
issue by documenting a declining growth rate in R&D
expenditure around the time of a CEO turnover. This result
can be interpreted either as a manifestation of strategic
behavior among managers seeking to manipulate earnings
to preserve their job or as an observation attributable to
poor firm performance, which is also the primary catalyst
for CEO turnover (Murphy & Zimmerman, 1993). A more
direct test of strategic behavior among managers seeking
to preserve their job is to assess the trade-off between real
and accruals earnings management aimed at improving
firm performance. Demers and Wang’s (2010) study repre-
sents a step in this direction, although they do not examine
the association between earnings management strategies
and the probability of CEO turnover.
SOX implications for CEO turnover research
Although SOX does not directly address the topic of CEO
turnover, ‘‘. . . the mandated changes promulgated by SOX
increase the responsibility of directors as monitors. Part
of a director’s monitoring role relates to evaluating CEO
performance and making decisions that affect CEO tenure.
SOX might influence how directors and other stakeholders
involved in firm governance handle performance issues re-
lated to the CEO’’ (Wang, Davidson, & Wang, 2010, p. 368).
The authors document no discernible change in CEO turn-
over in the post-SOX period.4 This seems surprising because
the post-SOX period is characterized by more vigilant board
monitoring which should make the performance-turnover
relationship more sensitive. One reason for no significant
change in CEO turnover relates to the fact that CEOs cut
down risky investments in the post-SOX period. This is an
important piece of evidence for regulators because it sug-
gests that CEOs could sacrifice value-enhancing investments
to preserve their job and thus have a negative effect on long-
run value creation for shareholders.
With respect to the effect of financial reporting quality
on CEO turnover, the authors find that restatements did
not increase CEO turnover in the post-SOX period, a result
consistent with that of Burks (2010). Burks (2010, p. 196)
hypothesized that CEO turnover was more likely with an
increase in restatement in the pre-SOX period, but not
the post-SOX period, because the severity of the restate-
ments in terms of dollar amounts and subsequent impact
on shareholder wealth became lower. With this decline
in restatement severity after SOX, ‘‘the possibility exists
that the pressures of the post-SOX era lead boards to fire
managers for restatements when such an action may be
suboptimal for shareholders’’ (p. 196). Burks, however, re-
ports a significantly positive impact of restatement on CFO
turnover in the post-SOX period. Collins, Masli, Reitenga,
and Sanchez (2009) assess the effect of restatement on
CFO turnover and find that restating firms have a higher
rate of forced CFO turnover relative to a control group of
non-restating firms. However, the passage of SOX has been
found to have no significant impact on CFO turnover
4
Guo and Masulis (2012), however, find firms that are forced to adopt a
majority independent board or a fully independent nominating committee
experience an increase in sensitivity of forced CEO turnover to firm
performance post-SOX.
98 A. Habib, M. Hossain / Research in Accounting Regulation 25 (2013) 88–100
following restatements. Nevertheless, CFOs who lost their
job faced more severe labor market penalties in the post-
SOX period, consistent with Fama’s (1980) ex-post set-
tling-up hypothesis. With respect to the effect of SOX on
new appointments of CEOs, Cullinan and Poush (2011) find
that the percentage of newly-appointed CEOs with
accounting/finance backgrounds significantly increased in
the post-SOX period compared to the pre-SOX period.
Whether this phenomenon enabled managers to engage
in strategic earnings manipulation practice is an interest-
ing research question. Cohen, Dey, and Lys (2008) find that
managers switched from accruals management to real
earnings management techniques to meet and/or beat
earnings benchmarks5 in the post-SOX era. Accrual earnings
management is more likely to be detected, and the conse-
quences of detection have become more onerous since the
passage of SOX. A promising area for future research would
be to examine the effect of this switch on CEO turnover
probability in the post-SOX period.
Managerial characteristics research and its implications
A substantial volume of academic literature has investi-
gated the determinants of accounting policy choices.
Fields, Lys, and Vincent (2001) review studies examining
the determinants and consequences of accounting policy
choices with a focus on three types of market imperfec-
tions: agency costs, information asymmetries, and exter-
nalities affecting non-contracting parties. The authors,
however, conclude that this vast body of research has
had a limited impact in enriching our understanding of
accounting choice. The failure of researchers to incorporate
distinct managerial styles as important determinants of
accounting policy choices may have contributed to this
limited understanding. Emerging research on managerial
overconfidence is ushering in a promising new basis for
understanding cross-sectional variation in managerial
accounting policy choice decisions. This strand of literature
shows that overconfident managers are more likely to en-
gage in manipulative accounting practices including fraud-
ulent activities (Schrand & Zechman, 2012), issue more
optimistic forecasts (Hribar & Yang, 2010), and become less
accurate in forecasting future earnings (Hillery & Hsu,
2011). Given that CFOs are more directly involved with
financial reporting issues than are CEOs, it should be inter-
esting to examine the possible conflicts arising from CEO/
CFO overconfidence traits.
Conclusion
In this paper we reviewed literature on the relation be-
tween financial reporting and the attributes of CEOs and
CFOs of the companies. Our review concentrated on empir-
ical studies that examine (i) whether the managerial labor
5 Baik, B., Farber, D. B., & Lee, S. (2011). CEO ability and management
Research on the effect of meeting analyst expectations on the proba-
bility of CEO turnover provides strong evidence that this probability
increases when actual earnings fall short of analyst forecasts (Farrell &
Whidbee, 2003; Goyal & Park, 2002; Puffer & Weintrop, 1991; Engel, Hayes,
& Wang, 2003.). The extent to which managers engage in earnings
manipulation to meet and/or beat forecasts as a job preserving strategy is
an issue that remains unexplored.
market discipline culpable managers for financial report-
ing manipulation (CEO turnover); (ii) emerging research
on the impact of managerial overconfidence on financial
reporting properties such as the issuance and accuracy of
management earnings forecasts and managerial proclivity
to engage in fraudulent activities; (iii) CEO/CFO gender-
based empirical research. We also discuss the implications
of the three strands of literature reviewed herein.
Our reviews of the empirical studies suggest that the
association between poor financial reporting and CEO
turnover is not conclusive. While some studies find a posi-
tive association, some other fails to document any associa-
tion at all. This is also not clear whether the poor quality of
reporting or the perception associated with poor quality
reporting drives the positive association. Implementation
of SOX did not have a direct impact on CEO turnover prob-
abilities. This is surprising since the post-SOX period is typ-
ically characterized as strong board oversight which was
expected to make the performance-turnover relationship
more pronounced. One possible explanation for this find-
ing that pertains to the fact that CEOs cut down risky
investments in the post-SOX period and/or financial
reporting quality improved because of strong monitoring
by boards. However, CFOs have come under pressure after
the passage of SOX as is evidenced from a PWC report
(Price Waterhouse Coopers, 2008). The report shows that
CFO turnover for Fortune 500 and S & P 500 companies in-
creased from 13% in 2003 to 17% in 2007. Finally our re-
view of the literature on the effect of CEO/CFO
characteristics on reporting quality reveals some promis-
ing avenue for future research although the findings need
to be cautiously interpreted because of reliable proxies
for measuring managerial characteristics.
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