Is a senior executive more likely to sugarcoat how well the firm is doing if that person sits on the company’s board of directors?
New research from Emanuel Zur, assistant professor of accounting and information assurance at the University of Maryland’s Robert H. Smith School of Business, finds that the executive’s status with the board of directors does indeed have an impact.
Zur and his co-authors studied the effect of personal litigation risk on disclosure and accounting decisions, using the Gantler v. Stephens court case from the Delaware Supreme Court as a basis for the experiment. The court’s ruling says that corporate officers who don’t serve on the company’s board of directors can potentially be held personally liable for breaching their fiduciary duty to the firm.
The researchers specifically studied the companies’ chief financial officers, largely because, they are the corporate officers who are, they say, “most likely to influence disclosure and accounting decisions.” The researchers say they wanted to investigate “how the ruling affects their choices.”
They compared compare firms with CFOs who do not serve on their firm’s board of directors to firms with CFOs who do serve on their firm’s board of directors. And they found that after the 2009 Gantler ruling, firms with CFOs not serving on the board have been more likely to disclose negative news early and more likely to report more conservative financial statements. However, the two groups show no statistically significant contrast in accrual earnings management practices.
The research also shows that non-board member CFOs “use a more negative tone during earnings announcements conference calls,” the researchers say. “Taken together, our results suggest that CFOs have a significant influence on firms’ disclosure decisions and respond to personal litigation risk over and above corporate litigation risk.”
Read more: The Effect of CFO personal Litigation Risk on Firms' Disclosure and Accounting Choices is featured in Contemporary Accounting Research.
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