CFOs Gender and Real Earnings Management

Abstract

Using accruals as a proxy for financial reporting quality, Peni and Vahamaa (2010) and Barua, Davidson, Rama, and Thiruvadi (2010) provide evidence that female Chief Financial Officers (CFOs) are more moral than male CFOs. Using 2,048 U.S. firm-year propensity score matching samples from 1997-2014, this stereotyped relationship is re-examined by empirically testing the likelihood of Real Earnings Management (REM) by female CFOs. Overall, the results show that female CFOs are, on average, 6% more likely to manipulate REM than male CFOs. One possible explanation for these results is that female CFOs face significant pressure (e.g., age, wage or diversity) and/or are motivated by earnings management incentives (e.g., avoiding reporting losses, meeting earnings benchmarks or beating analysts’ forecasts). The likelihood of REM by female CFOs is weakened after including pressure on female CFOs into the regression models. Surprisingly, the results suggest that female CFOs who beat analysts’ forecasts by more than one cent are less likely to manipulate REM. This latter result suggests that the documented association between female CFOs and REM might be triggered by poor firm performance. Further analysis suggests that while female CFOs are significantly associated with high firm performance, female CFOs who manipulate REM are significantly associated with low firm performance, especially cash flow from operations. This study contributes to prior literature on diversity, organizational behavior, and earnings management in several ways. It suggests that individual behaviors in organizations are more complex than they appear. Early childhood and heredity may not be valid structural determinants of organizational behavior.