Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

Alaa Mansour Zalata,Ahmed Aboud,Ernest Gyapong,Collins Ntim

doi:10.1007/s10551-018-3918-y

Abstract

The question of whether females tend to act more ethically or risk-averse compared to males is an interesting ethical puzzle. Using a large sample of US firms over the 1992–2014 period, we investigate the effect that the gender of a chief executive officer (CEO) has on earnings management using classification shifting. We find that the pre-Sarbanes–Oxley (SOX) Act period was characterized by high levels of classification shifting by both female and male CEOs, but the magnitude of such practices is, surprisingly, significantly higher in firms with female CEOs than in those with male CEOs. By contrast, our results suggest that following the passage of the punitive SOX Act, classification shifting by female CEOs declined significantly, whilst it remained pervasive in firms with male CEOs. This suggests that the observable differences in financial reporting behavior between male and female CEOs seem to be because female CEOs are more risk-averse, but not necessarily more ethically sensitive than their male counterparts are. The central tenets of our findings remain unchanged after several additional checks, including controlling for alternative earnings management techniques, corporate governance mechanisms, CEO and chief financial officer characteristics and propensity score-matching.

Highlights

The introduction in the 1960s of a number of gender-focused equal opportunities laws, especially in developed countries, such as the 1963 Equal Pay Act of the US, helped in increasing women’s participation in the workforce (Khlif and Achek 2017)
To investigate female chief executive officer (CEO)’ preference towards classification shifting (Hypothesis 1), we focus on the coefficient of special items (SPI) and interaction between SPI and FCEO
As a robustness test, we extend our control variables to include a number of additional corporate governance, CEO and chief financial officers (CFOs) characteristics, including percentage of institutional ownership (INSTOWN), the presence of blockholders (BLOCK), CEOs’ tenure (CEOTEN) and CFO gender (FCFO), where INSTOWN is measured as the number of shares held by institutional shareholders divided by the number of SPI FCEO SOX SPI × FCEO SPI × SOX FCEO × SOX SPI × FCEO × SOX SIZE LEV operating cash flow (OCF) return on assets (ROA) market-to-book value ratio (MBV) AUDIT CEO age (CEOAGE) CEOTEN INSTOWN BLOCK FCFO _CONS YEARS Adj

Summary

Introduction

The introduction in the 1960s of a number of gender-focused equal opportunities laws, especially in developed countries, such as the 1963 Equal Pay Act of the US, helped in increasing women’s participation in the workforce (Khlif and Achek 2017). Suggest that gender has a positive effect on firm performance/value (Carter et al 2003; Gul et al 2011; Liu et al 2014; Ntim 2015; Shrader et al 1997).1 Such positive gender effects have been attributed to rational-economic inspiredtheories, such as agency, resource dependence, stakeholder and stewardship theories, which indicate that the presence of women in boardrooms enhances board independence, monitoring, advisory capacity and resources through greater connection of the firm to the external environment (Adams 2016; Kirsch 2017; Terjesen et al 2009) Suggest that gender has a positive effect on firm performance/value (Carter et al 2003; Gul et al 2011; Liu et al 2014; Ntim 2015; Shrader et al 1997). Such positive gender effects have been attributed to rational-economic inspiredtheories, such as agency, resource dependence, stakeholder and stewardship theories, which indicate that the presence of women in boardrooms enhances board independence, monitoring, advisory capacity and resources through greater connection of the firm to the external environment (Adams 2016; Kirsch 2017; Terjesen et al 2009)

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Results

Conclusion