Does the market value the accounting expertise of chief financial officers? Evidence from the market value of cash holdings

• Published date: 01 April 2023
• Author: Li Gao,Jay Junghun Lee,Yong‐Chul Shin
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22596

Received:  August  Revised:  September  Accepted:  September 

DOI: ./jcaf.

RESEARCH ARTICLE

Does the market value the accounting expertise of chief

financial officers? Evidence from the market value of cash

holdings

Li Gao1Jay Junghun Lee2Yong-Chul Shin2

School of Business, State University of

New Yorkat New Paltz, New Paltz, New

Yor k, USA

Accounting and Finance Department,

University of Massachusetts Boston,

Boston, Massachusetts, USA

Correspondence

Li Gao, School of Business, State

University of New Yorkat New Paltz, 

Hawk Drive New Paltz, NY , USA.

Email: Gaol@newpaltz.edu

Abstract

This study investigates whether and how equity investors value the accounting

expertise of chief financial officers (CFOs) in managing cash assets. Using hand-

collected CFO data of S&P  firms from  to , we find that the stock

market places a higher value on cash assets when firms replace a non-accountant

CFO with an accountant CFO. Specifically, the market value of an additional

dollar of cash increases by  cents following such CFO turnovers. Moreover,

we find that the positive effect of CFOs’ accounting backgrounds on the market

value of cash is particularly evident for firms in low growth industries and firms

with weak corporate governance. Our evidence highlights efficient cash man-

agement as an important channel through which accountant CFOs contribute

to firm value.

KEYWORDS

accounting expertise, cash management, chief financial officers

1 INTRODUCTION

This study examines whether and how equity investors

value the accounting expertise of chief financial officers

(CFOs) in managing cash assets. A large body of research

has investigated the relation between CFOs’ accounting

expertise and various corporate outcomes. Recently the

literature has focused on the impact of CFOs with profes-

sional accounting backgrounds (i.e., accountant CFOs) on

external financial reporting. This line of research finds that

firms with accountant CFOs provide higher-quality finan-

cial reporting than those with non-accountant CFOs (e.g.,

Aier et al., ; Arthaud-Day et al., ; Bedard et al.,

;Lietal.,; Zhang et al., ). In contrast, Hoitash

et al. () show that firms with accountant CFOs under-

take more conservative investment and financing policies

and thus firms operating in high (low) growth indus-

tries suffer (benefit) from the appointment of accountant

CFOs. Therefore, existing research provides mixed evi-

dence regarding the contribution of accountant CFOs to

firm value.

In this study, we investigate whether and how accoun-

tant CFOs are associated with the market value of cash

assets. We focus on the market value of cash holdings

because CFOs are the ones mainly responsible for man-

aging cash assets. Liquid assets play a fundamental role

in business success. Among all corporate resources, cash

assets (including cash equivalents and marketable secu-

rities) are most susceptible to agency problems between

shareholders and managers (Dittmar & Mahrt-Smith,

;Jensen,). While top executives can exercise con-

siderable discretion over the use of liquid assets, they are

subject to limited scrutiny or monitoring on cash expen-

ditures from the board of directors or other governance

mechanisms (e.g., Johnson et al., ; Myers & Rajan,

). Consequently, managers may abuse liquid assets

70 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

GAO  . 71

when their firms hold large amounts of free cash flows

(Jensen, ;Walkling,). As gatekeepers of cash

expenditures, CFOs can constrainthe misuse of cash assets

(by CEOs and/or other managers) to maximize sharehold-

ers’ value. The accounting competence of CFOs would

improve their ability to manage liquid assets efficiently

(Hoitash et al., ). However, CFOs may corroborate

with CEOs and/or other managers to abuse cash assets for

their personal benefits. Accountant CFOs may take advan-

tage of their accounting expertise to maximize personal

wealth at the expense of shareholders (Albrecht et al.,

). Therefore, it is an interesting empirical question

whether and how external investors value the accounting

expertise of CFOs in managing liquid assets.

Weemploy the value-of-cash model developed by Faulk-

ender and Wang (), which regresses abnormal stock

returns on the annual change in cash holdings and con-

trol variables. Following Hoitash et al. () and Bernard

et al. (), we classify CFOs into accountant CFOs and

non-accountant CFOs by whether CFOs have a CPA cer-

tification or not. Since the appointment of an accountant

CFO is not random, we utilize two empirical approaches to

mitigate the endogeneity concerns. We apply the propen-

sity score matching (PSM) that matches each firm having

an accountant CFO with a control firm having a non-

accountant CFO to make the pair havesimilar characteris-

tics other than the accounting backgrounds of a CFO. We

also focus on CFO turnovers to test the effect of accoun-

tant CFOs on the value of cash. Specifically, we examine

the effect of CFO changes (from a non-accountant CFO to

an accountant CFO and vice versa) rather than comparing

firms with and without an accountant CFO because the

latter analysis is more susceptible to an omitted variable

bias.

Using hand-collected CFO data from S&P  firms

over the period of  to , we find that the market

value of cash is positively associated with the appoint-

ment of accountant CFOs. Specifically, the market places

a significantly higher value on cash assets when a firm

replaces its non-accountant CFO with an accountant CFO,

but investors do not discount the market value of cash

holdings when a firm replaces an accountant CFO with

a non-accountant CFO. The marginal value of each dol-

lar of cash increases by  cents when the firm recruits

an accountant CFO to replace a non-accountant CFO. The

results suggest that the positive association is particularly

evident when CFO turnover improves (rather than dete-

riorates) the accounting expertise of CFOs. We also find

that the positive association between accountant CFOs and

the market value of cash holdings is concentrated in firms

operating in low growth industries and firms with weak

governance. This evidence is consistent with the notion

that investors place a positive value on the role of accoun-

tant CFOs in mitigating agency problems by constraining

the abuse of liquid assets. Further analyses indicate that

our results are robust to co ntrolling for financial reporting

quality and other firm-level factors that might affect the

market valuation of cash assets.

Our study differs from a related study by Hoitash

et al. () in three ways. First, we employ the value-

of-cash model to examine the value implication of CFOs’

accounting expertise while Hoitash et al. use multiple

firm performance proxies including Tobin’s Q for firm

value. Our study provides a direct test of the contribu-

tion of accountant CFOs to firm value through their role

in managing liquid assets. Second, we perform a changes

analysis that relates the change in CFOs’ accounting exper-

tise to the change in firm value while Hoitash et al.

present only univariate regressions that associate perfor-

mance proxies with the presence of an accountant CFO in

a firm. Hence, our results are less likely to be influenced

by endogeneity or correlated omitted variables. Third,

we show that the market places a positive value on the

appointment of accountant CFOs for the full sample, but

Hoitash et al. do not provide results for their full sam-

ple before splitting it into high and low growth industries.

We do not find any negative valuation on the appoint-

ment of accountant CFOs even in high growth indus-

tries whereas Hoitash et al. find the negative association

between accountant CFOs and Tobin’s Q in high growth

industries.

This paper makes several important contributions to

the existing literature. First, our study adds to the grow-

ing literature on the contribution of accountant CFOs to

firm value. While previous studies have mainly examined

the role of accountant CFOs in financial reporting, we

focus on their role in managing cash assets and the market

valuation of such a role. Our results suggest that effi-

cient cash management is an important channel through

which accountant CFOs contribute to firm value. Hence,

our paper extends the literature by examining the role

of accountant CFOs other than external financial report-

ing. Second, this study contributes to the literature on the

value of cash assets. Our paper provides evidence that

the accounting expertise of CFOs is positively associated

with the market value of cash. Third, this study is related

to prior research on the role of accountants in corporate

governance and internal control. Our results suggest that

the positive effect of CFOs’ accounting expertise on the

value of cash is concentrated in firms with weak gover-

nance, which highlights the role of accountant CFOs as an

internal gatekeeper of liquid resources.

The remainder of the paper is organized as follows.

Section develops our testable hypotheses and describes

the research design. Section reports the sample selec-

tion and summary statistics. Section presents empirical