CFO Succession and Corporate Financial Practices

Abstract

We examine the determinants and performance consequences of Chief Financial Officer (CFO) successions in years 2002-2008. We argue that if internal monitoring mechanisms are effective, forced CFO departures are more likely in firms with poor financial practices, followed by improvements in these financial practices. We find that (1) the probability of forced CFO turnover is associated with incidences of accounting restatements, internal control weaknesses, relatively severe financial constraints, receipt of SEC comment letters, and late regulatory filings; (2) CFO successions following forced turnover are associated with subsequent improvements in these financial outcomes. Several of these findings are specific to CFO turnover and succession and not to CEO turnover and succession, suggesting that CFOs are responsible for the outcomes of financial activities in which they have more direct influence and that successor CFOs have a direct impact on the subsequent financial outcomes.