Implications of power: When the CEO can pressure the CFO to bias reports |
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Authors: | Henry L Friedman |
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Institution: | UCLA Anderson School of Management, 110 Westwood Plaza, D402 Cornell Hall, Los Angeles, CA 90095, United States |
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Abstract: | Building on archival, anecdotal, and survey evidence on managers? roles in accounting manipulations, I develop an agency model to examine the effects of a CEO?s power to pressure a CFO to bias a performance measure, like earnings. This power has implications for incentive compensation, reporting quality, firm value, and information rents. Predictions from the model provide potential explanations for the differing results from recent empirical studies on the impact of regulatory interventions like SOX and the extent to which the CEO?s or CFO?s incentives significantly impact on earnings management. The model also identifies conditions under which either a powerful or a non-powerful CEO can extract rents, which can help explain mixed empirical results on the association between CEO power and “excessive” compensation. |
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Keywords: | D86 G34 J33 M12 M41 |
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