Implied Tradeoffs of Chief Financial Officer Accounting Expertise: Evidence from Firm-Manager Matching

Abstract

We present evidence that although individuals with accounting expertise bring key skills to the financial reporting responsibilities of the chief financial officer (CFO) position, they tend to lack educational and career experiences relevant to nonaccounting responsibilities (e.g., operations and strategy). Assuming boards’ perceptions of CFO accounting expertise are correct on average, we provide evidence of tradeoffs of CFO accounting expertise by examining how differences in CFO backgrounds shape executive employment decisions. Firms with greater demand for nonaccounting expertise are less likely to hire an accounting expert CFO, consistent with ex ante firm-manager matching. Ex post, significant declines in firm-manager fit predict CFO turnover and other compensating changes in the composition of the senior management team. Accounting expert CFOs are also less likely to become chief executive officers, suggesting that CFO experience does not fully mitigate these tradeoffs. Collectively, the results suggest important tradeoffs inherent to CFO accounting expertise that shape the structure of the senior management team. This paper was accepted by Suraj Srinivasan, accounting.

CFO Effort and Public Firms' Financial Information Environment*

“…However, the role of the CFO has expanded significantly in the past decade. CFOs' roles have expanded to operations, strategy, and technology (Hoitash et al 2016; Bernard et al 2020). Often it is chief accounting officers (i.e., CAOs) who have a direct influence on accounting decisions.…”

Antecedents of and outcomes after finance committee use

“…We find similar patterns when we use a number-of-years threshold (i.e., we classify finance committees as permanent if they remain in place for at least 5 years). with the needed expertise (Bernard et al, 2021;Hoitash et al, 2016;Li et al, 2010). Boone and Mulherin (2017) document that target firms use special committees during corporate takeovers.…”

The impact of connections between the CEO and top executives on appointment, turnover and firm value

“…(2018) “finds that candidates who have shared connections and experiences with the CEO … are more likely to be appointed CEO.” Other related studies include Grabner and Moers (2013) who examine the choice of performance measures in appointment and promotion decisions; Frederiksen and Kato (2018) who study the impact of human capital on TMT appointments and Bernard et al. (2021) who examine how the skill sets of CFO candidates compare to firm needs in appointment decisions. To the best of our knowledge, no study has examined if or how pre‐existing network connections with the CEO impact non‐CEO TMT appointments.…”

“…Despite the importance of these non‐CEO executives, little research has been done on their appointments and departures. Although several studies explore CEO appointments (e.g., Boivie et al., 2016; Cook & Mobbs, 2019; Datta & Guthrie, 1994; Hoitash & Mkrtchyan, 2018; Wiersema et al., 2018), few papers examine the appointment or promotion of non‐CEO executives (exceptions include Bernard et al., 2021; Boivie et al., 2016; Frederiksen & Kato, 2018; Grabner & Moers, 2013). Likewise, while research has examined the appointment of directors (e.g., J. Cai et al., 2017; Erel et al., 2018; Krause et al., 2017; Westphal & Stern, 2007), we are unaware of any that focus on internal appointments.…”