CFO Narcissism And Financial Reporting Quality

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CFO Narcissism And Financial Reporting Quality by SSRN

Charles (Chad) Ham

University of Maryland – Department of Accounting & Information Assurance

Mark H. Lang

University of North Carolina at Chapel Hill

Nicholas Seybert

University of Maryland – Department of Accounting & Information Assurance

Sean Wang

University of North Carolina – Kenan-Flagler Business School

April 2015

Robert H. Smith School Research Paper No. RHS 2581157


We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting outcomes. 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 to be associated with more earnings management, less timely loss recognition, weaker internal controls, and a higher probability of restatements. Results are consistent for within-firm comparisons focusing on CFO changes and are robust to controlling for overconfidence and CEO narcissism. These results highlight the importance of CFO characteristics in the domain of financial reporting decisions.

CFO Narcissism And Financial Reporting Quality – Introduction

“I ought to be CFO of the year. I’ve seen it in CFO Magazine. I want it to be me. Do you realize what a great job I’ve done at this company?” Andrew Fastow, former CFO of Enron, made these statements shortly before the exposure of the massive fraud that he helped orchestrate (Eichenwald 2005). Eichenwald’s interviews with Fastow’s colleagues portray him as a narcissist who would do anything for his own self-interest at the expense of the welfare of those around him. Psychology research suggests such behavior is typical of narcissists, with a variety of studies demonstrating that symptoms of narcissism include excessive focus on oneself, inflated sense of self-worth, domination of decision processes, failure to take feedback from others, and a need for constant recognition and reward (Wink 1991; Oliver and Robins 1994; Rhodewalt and Morf 1995; Lakey, Rose, Campbell and Goodie 2008; Goncalo, Flynn and Kim 2010; Nevicka, Ten Velden, De Hoogh and Van Viannen 2011; Tamborski, Brown and Chowning 2012).

In this paper, we draw from the psychology literature to investigate the effects of CFO narcissism on financial reporting outcomes. We focus on CFO narcissism because the CFO’s domain is financial and includes oversight of financial reporting decisions. We are the first, to our knowledge, to consider the role of CFO characteristics in affecting
financial reporting outcomes. We expect the sense of entitlement, domination of decisions, inflated self-perception, and need for recognition by narcissistic CFOs to be reflected in the financial reporting outcomes of the company. In particular, we examine the links between CFO narcissism and financial reporting outcomes such as earnings management, timely loss recognition, internal control quality, and financial restatements. Given that the prior psychology literature suggests that narcissists tend to be self-entitled, exploitive and domineering, we expect that narcissists will be more willing to exploit power and information asymmetry to engage in misreporting.

Because executives’ personality traits are difficult to directly measure, the empirical literature seeks unobtrusive, valid proxies to capture the underlying constructs.1 Prior studies have utilized measures such as the CEO’s prominence in annual reports and press releases or the executive’s compensation relative to other executives (Chatterjee and Hambrick 2007; Schrand and Zechman 2012; Olsen, Dworkis and Young 2014). However, these measures are likely influenced by others and may be largely outside of the executive’s control.2 Further, recent research has questioned the construct validity of previously used measures (Koch and Biemann 2014). Therefore, we turn to a measure that is publicly available for a large sample of CFOs and is unlikely to be influenced by the firm: their signature size.

The link between narcissism and signature size has a long history in the psychology literature (e.g., Zweigenhaft and Marlowe 1973; Jorgenson 1977; Zweigenhaft 1977). However, because the link between narcissism and misreporting has not been explicitly examined in the prior literature, we first validate the link between signature size, narcissism and misreporting in an experimental setting. In our experiment, subjects receive an endowment that is self-reported to a partner, on the basis of which the endowment is shared. We examine the relation between signature size (as measured by the area-per-letter of the signature on the consent form and described in section 3.2), attributes of narcissism based on Narcissistic Personality Inventory (NPI-40) scores and the willingness to misreport the initial endowment. We document a positive and monotonic relation between quartiles of signature size and (1) the NPI-40 narcissism measurement and (2) the magnitude of misreporting.

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