Journal of Applied Finance & Banking

The Impact of CEO Characteristics on Real Earnings Management: Evidence from the US Banking Industry

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  • Abstract

    Using US banking industry, this study investigates the impact of CEO characteristics on real activities manipulation achieved by changing the normal operational decisions purposely. Overall, our empirical results present a negative relationship between real earnings management (REM) and some CEO characteristics, including CEO tenure, the directorship on the audit committee and the level of diligence as well. High CEO compensation is found to increase the real earnings management while the levels of pay-performance sensitivities have different influences on it at banks with CEO high (HPPS) and low (LPPS) pay-performance-sensitivity respectively. CEO experiences turns out to have a positive effect on earnings management at HPPS banks and a negative effect on LPPS. CEO power has a significant influence in HPPS bank’s REM but it is not supported in LPPS banks. Holding other directorship has a significantly positive effect on earnings management at HPPS while it is not at LPPS bank. On the contrary, CEO’s meeting attendance and total compensation have positively affected REM at LPPS but they are not at HPPS. Finally, we surprisingly found that only CEO experience and profession has a significantly moderate effect on bank’s REM after financial crisis of 2008, however, all CEO characteristics have significant impacts on bank’s earnings management before crisis. We conjecture that experienced CEOs are easy to window dressing the financial statements when facing serious financial crisis.

    JEL classification numbers: M41, M49
    Keywords: CEO, earnings management, banks