CFO Career Concerns and Strategic Decisions: An Empirical Analysis of M&As

Abstract

Chief financial officers (CFOs) have become increasingly involved in strategic decisions. The literature has emphasized the potential benefits of this development, delineating CFOs as impartial advisors who ensure economically conscious decisions. Our study, however, suggests that the career concerns of CFOs create signaling incentives that detrimentally influence the outcomes of strategic decisions. Based on the merger and acquisition (M&A) decisions of S&P 500 firms between 2005 and 2018, our results show that CFOs with higher signaling incentives (i.e., at earlier and later career stages) are associated with lower M&A returns, higher M&A premiums, greater M&A activity, and riskier M&A features (e.g., large, diversified, or cross-border deals). This association is stronger when chief executive officers are more likely to delegate decision authority to CFOs, whereas it is weaker when CFOs have a higher reputation, strong long-term incentives, and when there is strong external monitoring. Our results further indicate that the labor market highly values the M&A experience of CFOs and only lightly punishes CFOs involved in value-destroying M&As.