We investigate whether the characteristics of chief financial officers (CFOs) are associated with accounting errors (using accounting restatements as a proxy). We investigate several metrics of financial literacy similar to those suggested for members of audit committees by the NYSE-NASD Blue Ribbon Committee. These metrics include years of work as a CFO, experience at another company, advanced degrees (like M.B.A.s), and professional certification (like a CPA). We use a logit model to test whether the likelihood of an earnings restatement is related to the above metrics of financial literacy (measured at the date of the original accounting error). Restating and non-restating companies during the period 1997–2002 were matched on year, industry, and company size. Overall, our results are consistent with restatements being negatively associated with the CFO's financial expertise. Specifically, we find that companies whose CFOs have more work experience as CFOs, M.B.A.s, and/or CPAs are significantly less likely to restate their earnings.

Debtholders’ demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. In addition, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of the board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders’ demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders’ demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of the board of directors in financial reporting.

This study extends prior research on the tax-motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993–2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories.

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