Powerful CEOs and earnings quality

Abstract

Purpose

This study explores the effect of CEO power on earnings quality. If powerful CEOs make the information environment more opaque, they can easily conceal information to hide self-dealing behavior through earnings manipulation. Conversely, if powerful CEOs who are well-protected create a transparent information environment, they will provide better quality earnings.

Design/methodology/approach

The author constructs a composite index for CEO power by combining seven CEO characteristics and employs two variables including discretionary accruals and earnings response coefficient as proxies for earnings quality.

Findings

The author’s main results show a significant negative relation between CEO power and the firm's earnings quality. In addition, CEOs with stronger structural power and expert power are more likely to generate lower earnings quality, while those with stronger ownership power are more likely to provide higher earnings quality.

Originality/value

The findings suggest that CEO power reduces the firm's earnings quality because CEOs with structural power or expert power may destroy governance monitoring mechanisms.

Citation

Shiah-Hou, S.-R. (2021), "Powerful CEOs and earnings quality", Managerial Finance, Vol. 47 No. 12, pp. 1714-1735. https://doi.org/10.1108/MF-07-2020-0363