Executive Team Financial Expertise and the Influence on Financial Reporting

Abstract

While a considerable body of research examines the determinants of financial reporting decisions, much of the heterogeneity in financial reporting outcomes is not explained by firm and industry factors. Guided by the Upper Echelons perspective of Hambrick and Mason (1984), I examine the relation between the presence of a financial expert, defined as either a CEO or a CFO with an accounting background and earnings quality. I propose that the coupling of decision rights and domain-specific knowledge supports the team's influence discretionary reporting choices, controlling for incentives, corporate governance and firm-specific factors. I find that in the pre Sarbanes Oxley era, executive teams with financial expertise have higher discretionary earnings quality as measured by smaller absolute abnormal accruals; however, this relation is eliminated in the period following Sarbanes Oxley. Building on research that proposes that accruals management and real activities management are substitutes, I examine four proxies for real activities management and do not find evidence of a relation between firms with executive teams with financial expertise and these proxies for real activities management.