CEO Career Concerns and Financial Reporting Quality:Evidence from Chinese Publicly Listed Companies

 

Xie Jun & Liu Min (Wuhan University)

 

Abstract:As one vital channel for corporate information transmission, high financial reporting quality can improve financial report users’ decision efficiency and reduce corporate agency and capital costs. Hence, financial reporting quality has been examined widely by scholars. Prior literature suggests that financial reporting quality is influenced by firm-level and outside institutional factors. Firm-level factors include corporate size, leverage, performance, ownership structure, board structure, executive incentives and so on, while outside institutional factors include audit firms reputation, law origins, the implementation of Sarbanes-Oxley Act, adoption of new accounting standards and so on.

However, considerable heterogeneity in accounting policies still cannot be explained byfirm-level or outside institutional factors. As the top executives in firms, CEOs can exert great discretionary influence on corporate decisions, which can ultimately affect a firm’s outcomes. This paper tries to investigate whether CEO career concerns, an important aspect of CEO characteristics, have impacts on financial reporting quality in Chinese publicly listed companies. CEO career concerns matter because CEOs are concerned with their reputation and inclined to control corporate policies to increase their reputation. First, the labor market supervises their current performance and there is a link between CEO reputation and their future employment opportunities. Second, the labor market will award prizes depending on the rank order of the competitors, which encourages CEOs to increase their chances of promotion and become irreplaceable.

We use age, new-appointment dummy, and pre-retirement dummy as proxies of career concerns and find that there is a negative relationship between CEO career concerns and financial reporting quality. The empirical results also demonstrate that the negative relationship between CEO age and financial reporting quality only exists in the sub-sample of state-owned enterprises, while CEO new-appointment dummy and pre-retirement dummy are more significant in the sub-sample of non-state-owned enterprises.

This paper makes the following contributions. First, we enrich the limited literature on CEO career concerns, which is not sufficiently investigated under the background of transition economies where managerial labor market is not well developed and corporate governance mechanisms are less stringent than US. Second, our findings extend the corporate governance and financial reporting quality literature by identifying CEO career concerns as a determinant of financial reporting quality. Third, we also explore the role of ownership structure in affecting CEO decision-making. CEOs in SOEs and non-SOEs are faced with different institutional constraints and have different objectives to achieve. Finally, our study contributes to the growing literature on how CEOs’ personal attributes shape corporate decision-making.

 

Key words:career concerns; financial reporting quality; ultimate ownership