CFO Narcissism and Financial Reporting Quality

Abstract

We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting quality. Experimentally, we validate that narcissism predicts misreporting behavior, and that signature size predicts misreporting through its association with narcissism. Empirically, we examine notarized CFO signatures and find CFO narcissism is associated with more earnings management, less timely loss recognition, weaker internal control quality, and a higher probability of restatements. The results are consistent for within‐firm comparisons focusing on CFO changes and are robust to controlling for CFO overconfidence and CEO narcissism. The results highlight the importance of CFO characteristics in the domain of financial reporting decisions.

Measuring executive personality using machine‐learning algorithms: A new approach and audit fee‐based validation tests

“…() measure CEO narcissism using CEO relative pay and the size and composition of the CEO's picture in the annual report; Cain and McKeon () and Sunder, Sunder, and Zhang () estimate risk taking and sensation seeking by CEOs having a pilot license; and Ham et al. () measure CFO narcissism based on the size of notarized CFO signatures provided to the SEC. Patelli and Pedrini () measure CEO integrity by examining the language used by CEOs in shareholder letters and characterize those who make excessive use of causation words as having lower integrity, whereas Larcker and Zakolyukina () develop a classification model based on word categories to measure CEO deception.…”

“…While research shows these measurements to be reliable, administering these types of tests on a large scale is not feasible. As Ham, Lang, Seybert, and Wang (, p. 1090) note, ‘executives are understandably unwilling to complete surveys or questionnaires to directly measure personality traits such as narcissism’. Plöckinger et al.…”

The Deliberate Engagement of Narcissistic CEOs in Earnings Management

“…To capture the narcissism trait, we build on the CEO Narcissism Score (CNS) proposed by Rijsenbilt (2011). There are several reasons why we choose this model over others that employ just one indicator such as first-person pronoun usage (Aktas et al 2016), signature size (Ham et al 2017), or ratings of video samples of CEOs (Petrenko et al 2016). Closest to our study is the measurement proposed by Chatterjee and Hambrick (2007) with a set of five indicators, which we explain in more detail later in this section.…”

Fraudulent Financial Reporting and the Consequences for Employees

“…Prior literature has examined the incentives to commit fraud. Executives' private benefits and their narcissism or willingness to cover up problems can trigger accounting fraud (e.g., Beneish, 1999;Armstrong et al, 2010;Ham et al, 2017). Kedia and Philippon (2009) demonstrate that executives engage in both accounting fraud and insider trading for their private benefits.…”

“…Among employees, some must have perpetrated the fraud. Much of the prior literature has examined executives' private benefits and their optimism (or narcissism) both as triggers of accounting fraud (e.g., Beneish, 1999;Armstrong et al, 2010;Schrand and Zechman, 2012;Ham et al, 2017). Also, prior literature has examined and found serious consequences for executives (e.g., Desai et al, 2006;Karpoff et al, 2008a).…”