Game on: CEO Political Ideology and the Numbers Game

Abstract

It is commonly known that CEOs manage corporate earnings and thus expose their firm, its shareholders, and stakeholders to potential harm for their personal benefit. To better understand the drivers of such unethical behavior, we take an upper echelons perspective and consider CEOs’ political ideology, i.e., their stance on the liberal–conservative continuum, as a fundamental determinant of personal preference that becomes reflected in firms’ earnings management. Analyzing a panel dataset of 872 S&P 1500 CEOs, we find considerable support for our arguments that more liberal CEOs prefer to improve (and more conservative CEOs to diminish) reported earnings and show how this inclination varies along a set of contextual characteristics demarcating the diverse preferences as CEOs’ dedication to the firm and its performance endures, increases, and escalates.