CFO Narcissism and Financial Reporting Quality

• DOI: http://doi.org/10.1111/1475-679X.12176
• Author: SEAN WANG,NICHOLAS SEYBERT,CHARLES HAM,MARK LANG
• Published date: 01 December 2017
• Date: 01 December 2017

DOI: 10.1111/1475-679X.12176

Journal of Accounting Research

Vol. 55 No. 5 December 2017

Printed in U.S.A.

CFO Narcissism and Financial

Reporting Quality

CHARLES HAM,

∗MARK LANG,

†NICHOLAS SEYBERT,

‡

AND SEAN WANG

§

Received 10 April 2015; accepted 19 February 2017

ABSTRACT

We investigate the effect of CFO narcissism, as measured by signature size, on

financial reporting quality. Experimentally, we validate that narcissism pre-

dicts misreporting behavior, and that signature size predicts misreporting

through its association with narcissism. Empirically, we examine notarized

CFO signatures and find CFO narcissism is associated with more earnings

management, less timely loss recognition, weaker internal control quality,and

a higher probability of restatements. The results are consistent for within-firm

comparisons focusing on CFO changes and are robust to controlling for CFO

overconfidence and CEO narcissism. The results highlight the importance of

CFO characteristics in the domain of financial reporting decisions.

JEL codes: G32; H32; M12; M40; M41

Keywords: financial reporting quality; narcissism; CFO; CEO; executives;

accruals; real earnings management; internal controls; restatements; con-

servatism

∗Olin School of Business, Washington University in St. Louis; †Kenan-Flagler Business

School, University of North Carolina at Chapel Hill; ‡Robert H. Smith School of Business,

University of Maryland; §Jones Graduate School of Business, Rice University.

Accepted by Philip Berger. Wethank Robert Bloomfield, Joseph Engelberg, Lindsey Gallo,

John Hand, Robert Libby, Eldar Maksymov,Mark Nelson, Kristina Rennekamp, Steve Salterio

and seminar participants at Cornell University, Erasmus University, University of Iowa, Uni-

versity of Miami, Queen’s University,and Singapore Management University for their helpful

comments. We thank Ivy Feng and Michelle Hess for research assistance. Any errors are our

own.

1089

Copyright C, University of Chicago on behalf of the Accounting Research Center,2017

1090 C.HAM,M.LANG,N.SEYBERT,AND S.WANG

1. 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 Fas-

tow, former CFO of Enron, made these statements shortly before the expo-

sure of the massive fraud that he helped orchestrate (Eichenwald [2005]).

Eichenwald’s interviews with Fastow’s colleagues portrayed him as a narcis-

sist who would do anything for his own self-interest at the expense of the

welfare of those around him. Psychology research suggests that such behav-

ior is typical of narcissists, as a variety of studies demonstrate that symptoms

of narcissism include an excessive sense of self-entitlement, willingness to

exploit others to serve one’s own needs, 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 et al. [2008], Goncalo, Flynn, and Kim [2010], Nevicka et al.

[2011], Tamborski, Brown, and Chowning [2012]). Consistent with a will-

ingness to engage in unethical behavior, narcissists have been shown to be

more likely to cheat on their spouses, commit white collar crimes, lie about

their own achievements, and commit academic fraud (Buss and Shack-

elford [1997], Blickle et al. [2006], Menon and Sharland [2011], Hales,

Hobson, and Resutek [2012]).

In this paper, we draw from psychology research to investigate the ef-

fects of CFO narcissism on financial reporting quality. We focus on CFOs

because their duties are financial and because they bear the prime respon-

sibility for reporting accurate and timely financial disclosures for the firm.

We focus on narcissism because CFOs with narcissistic personality attributes

(e.g., self-entitlement, exploitativeness, domineeringness, and inflated self-

perception) are more likely to misreport, consistent with the link between

narcissism and unethical behavior in the psychology literature. In particu-

lar, we examine the association between CFO narcissism and financial re-

porting outcomes such as earnings management, timely loss recognition,

internal control quality, and financial restatements.

Because executives’ personality traits are difficult to directly measure, the

empirical literature seeks unobtrusive, valid proxies to capture the underly-

ing constructs.1To capture narcissism, prior studies have utilized measures

such as the CEO’s prominence in annual reports and press releases or the

CEO’s compensation relative to other executives.2However, these previ-

ously used measures are largely unavailable for CFOs, are likely influenced

by others, and are largely outside of the CFO’s control.3Further, recent

1Executives are understandably unwilling to complete surveys or questionnaires to directly

measure personality traits such as narcissism (Koch and Biemann [2014], Olsen, Dworkis, and

Young [2014]).

2See, for example, Chatterjee and Hambrick [2007], Schrand and Zechman [2012], and

Olsen et al. [2014].

3For instance, CFOs’ pictures are not typically seen in annual reports, there is no CFO letter

to shareholders, and they are unlikely to be primary authors of press releases. Further, many

CFO NARCISSISM AND FINANCIAL REPORTING QUALITY 1091

research has questioned the construct validity of previously used narcissism

measures (Koch and Biemann [2014], Carey et al. [2015]). Instead, we uti-

lize a measure that is publicly available for a large representative sample of

CFOs and is unlikely to be influenced by others in the firm: their signature

size.4

The use of signatures in society has a long history, with specific instruc-

tions on signatures included in the Talmud from the fifth century. A sub-

stantial body of literature in psychology highlights the importance of sig-

natures as a “powerful symbolic representation of the self.”5Children,

for example, often spend hours perfecting their signatures, fans seek au-

tographs from celebrities, artists maintain unique signatures and charge

more for signed prints, and official forms often must be signed by hand in

the presence of a notary public. As a result, it does not seem surprising that

personality attributes such as narcissism could influence signatures.

The link between narcissism and signature size has a long history in the

psychology literature (Zweigenhaft and Marlowe [1973], Jorgenson [1977],

Zweigenhaft [1977]).6However, given that the link between signature size

and financial 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 re-

ceive 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),

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 signature size

quartiles and (1) the NPI-40 narcissism score, and (2) the magnitude of

misreporting. The relation is primarily driven by factors associated with ex-

ploitativeness and authoritativeness as measured by the NPI-40. Mediation

analyses indicate that the positive association between signature size and

misreporting is driven by the effects of narcissism.

Having documented the link between signature size, narcissism, and mis-

reporting in an experimental setting, we examine the relation between

CFO signature size and financial reporting quality for publicly traded firms.

corporations have disclosure committees and investor relations consultants that influence the

firm’s annual reports and press releases, as well as compensation committees that determine

executive compensation packages.

4Webb et al. [1966] advocate that social science researchers seek out unobtrusive “physical

trace” measures left behind by subjects that are unlikely to be influenced by the researcher or

others and are under the subject’s control. Our measure should satisfy those criteria because

our laboratory subjects and CFOs were unlikely to expect their signatures to be analyzed and

were in control of their signature size.

5See, for example, Chou [2015], Bryan, Adams, and Monin [2013], Bryan et al. [2011],

Kettle and Haubl [2011], and Shu et al. [2012].

6See also Snyder and Fromkin [1977], Dillon [1988], Kettle and Haubl [2011], Shu et al.

[2012], Lee, Gregg, and Park [2013], Ham, Seybert, and Wang [2017], and Chou [2015].