CEO Sensation Seeking and Financial Reporting Quality

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2018-08-29
Authors
Lobo, Gerald
Ouyang, Bo
Wang, Chong
Zhou, Jian
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Abstract
This study investigates whether CEOs’ sensation seeking is related to their firms’ financial reporting quality. Consistent with a tendency of sensation seekers to defy ethical rules, we find that firms with sensation-seeking CEOs have lower financial reporting quality and higher likelihood of accounting fraud. More specifically, we find that firms led by sensation-seeking CEOs engage in more accrual-based and real earnings management, have higher information opacity and are more likely to have internal control deficiencies and use less conservative accounting. Firms with sensation-seeking CEOs are also more likely to engage in accounting fraud as indicated by the SEC Accounting and Auditing Enforcement Release (AAER). We further find that good corporate governance does not mitigate the adverse effects of sensation-seeking CEOs on financial reporting quality. Finally, we find a positive association between sensation-seeking CEOs and audit fees. Our results are robust to CEO change, instrument variable method and propensity score matching. In summary, our results suggest that the CEO personality trait of sensation seeking plays an important role in financial reporting quality.
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CEO sensation seeking, financial reporting quality, private pilot licenses
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