CEO Cultural Masculinity and Earnings Management

Synopsis Research problem We evaluate how CEO cultural masculinity impacts earnings management practices. Motivation or theoretical reasoning Earnings management can impede corporate transparency and fair competition, mislead investors, and cause a significant decline in shareholder value once detected. Literature has shown that CEO traits and characteristics matter for their firm’s accounting practices, including earnings management. We consider the CEO’s cultural heritage, which influences the CEO’s values, beliefs, and preferences. We focus on a CEO’s masculinity, a set of cultural norms and values associated with the “masculine” dimension of being performance-driven versus the “feminine” dimension of caring ( Hofstede, 1980 , 2001 ). Masculinity is associated with a strong emphasis on achievement, competition, and pursuing material wealth, closely aligning with the motivations driving earnings manipulation. Arguably, masculine CEOs are more likely to engage in earnings management to meet their financial targets because they emphasize short-term financial success and achievement. Hypothesis A CEO’s cultural masculinity is positively associated with the firm’s earnings management. Target population We used a sample of U.S. Standard & Poor’s 1,500 nonfinancial firms from 2004 to 2015. Methodology We measured CEO cultural masculinity based on the CEO’s ancestry derived from their last name, using Hofstede’s cultural dimensions. Earnings management was measured using discretionary accruals from a modified Jones (1991) model and performance-adjusted discretionary accruals (Kothari et al., 2005). We also considered alternative measures of accounting malpractices, such as restatements and Securities and Exchange Commission (SEC) enforcement actions. Analyses In addition to panel data regressions, we conducted a difference-in-difference analysis to address the potential endogeneity concerns. We also ruled out several alternative explanations. Finally, we took further steps to examine how the associations vary across different levels of earnings management incentives and the strength of governance and monitoring mechanisms. Findings We document a positive relationship between CEO cultural masculinity and the firm’s earnings management. The analysis around CEO changes reinforces the findings. Further evidence shows that masculine CEOs manage earnings more before initiating acquisitions and following poor stock performance of their firms, while strong governance and monitoring mechanisms are effective in preventing earnings management by masculine CEOs.