On Wednesday, Sept 30th, 11 am ET, we will be joined by Kathy Petroni (Michigan State University).

Kathy will be talking about her paper, entitled “CFOs and CEOs:  Who Have the Most Influence on Earnings Management?”  The paper is forthcoming in the Journal of Financial Economics, and is co-authored with John (Xuefeng) Jiang and Isabel Yanyan Wang (also of Michigan State University).

The abstract of the paper reads:

This study examines the association between CFOs’ equity incentives and earnings management. CEOs’ equity incentives have been shown to be associated with accruals management, beating earnings benchmarks, and earnings restatements (Bergstresser and Philippon, 2006; Cheng and Warfield, 2005; McAnally et al. 2007; and Burns and Kedia, 2006). Given that CFOs’ primary responsibility is financial reporting, we argue that for a given level of equity incentives the CFO’s incentives should play a stronger role than those of the CEO. Consistent with this prediction, we find that the magnitude of discretionary accruals and the likelihood of beating benchmarks and earnings restatements are more sensitive to the CFOs’ equity incentives than to those of the CEO. Our evidence supports the SEC’s new disclosure requirement on CFO compensation.

While their study suggests that CFOs play a key role in understanding earnings management, a related study suggests that there might be clear and operational solution to the problem:  simply promote the CFO to CEO.  Then, as argued here by Steve Matsunaga and Eric Yeung, you will get higher quality financial disclosures (in the form of less aggressive/more conservative accounting policies and more precise earnings guidance) – perhaps the improvement in financial reporting quality comes because this group of CEOs (given their background) know how to watch out for shifty CFOs.

Be sure to join us on Wednesday for what promises to be an engaging and enlightening discussion!

Remember: You can attend Round Table Discussions in Second Life (instructions here) or on the web at our LIVE page.