CFOs’ Risk Preferences in Earnings Management: The Joint Effect of Risk-decreasing and Risk-increasing Incentives

42 Pages Posted: 20 Apr 2021

See all articles by Feng Han

Feng Han

Capital University of Economics and Business

Teresa Lightner

Oklahoma State University

Bing Luo

San Francisco State University

Date Written: April 19, 2021

Abstract

This study examines whether the equity incentives of the CFO are associated with earnings management. Prior research investigates delta and vega for the average of the top five executives on the firm’s financial misreporting. The top 5 executives variable most likely captures the culture of the firm as a whole rather than any one executive. We examine the CFO who is ultimately responsible for the quality of financial reporting. We find a negative effect of CFOs’ risk-decreasing incentives (delta) and a positive effect of CFOs’ risk-increasing incentives (vega) on our accrual-based earnings management proxies. Thus, we find the CFO responds to equity incentives differently from the average of the top five executives and that CFOs undertake or abstain from earnings management when it benefits their own wealth rather than shareholders’ interests.

Keywords: Equity Incentives, Executive Compensation, Risk-taking, Earnings Management, Accrual Earnings Management

JEL Classification: J33, G34, M41, M52

Suggested Citation

Han, Feng and Lightner, Teresa and Luo, Bing, CFOs’ Risk Preferences in Earnings Management: The Joint Effect of Risk-decreasing and Risk-increasing Incentives (April 19, 2021). Available at SSRN: https://ssrn.com/abstract=3829798 or http://dx.doi.org/10.2139/ssrn.3829798

Feng Han

Capital University of Economics and Business ( email )

Beijing
China

Teresa Lightner (Contact Author)

Oklahoma State University ( email )

Spears School of Business
345 Business Building
Stillwater, OK 74078
United States
4057448657 (Phone)
74078-4015 (Fax)

Bing Luo

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, 94132
United States

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