Getting CFO on board – its impact on firm performance and earnings quality

Abstract

PurposeThis paper aims to investigate the impact of Australian Chief Financial Officers (CFOs) as board insiders on firm performance and earnings quality with reference to agency theory and theory of friendly board.Design/methodology/approachThe ordinary least square, two-stage least-squares and propensity score matching regressions are performed with various proxies for firm performance and accruals quality.FindingsFirms with CFOs as board insiders experience significantly lower firm performance and earnings quality. In firms with powerful CEOs, the negative impact of CFO board membership on earnings quality is further magnified. Additionally, the negative impact of CFO board membership on firm values and earnings quality is only present in firms with bigger boards or firms with less outside directors. The findings are consistent with the agency perspective and in sharp contrast to the US market.Originality/valueThis is the first Australian study to examine the impact of CFO board membership on firm performance and earnings quality. The findings suggest that the monitoring of executives is best done by a small or independent board and that the insider board membership should be optimised.