The Chief Marketing Officer: an antidote to myopic earnings management practices

Abstract

To meet short-term earnings targets, firms often engage in real earnings management practices (REM) such as reducing advertising expenses and running sales promotions. Since these practices can hinder Chief Marketing Officers (CMOs) in building and maintaining market-based assets of firms, the authors hypothesize that firms with CMOs will be less likely to engage in REM. Using publicly available secondary data, the authors show that CMO presence decreases a firm’s propensity for REM and that the CMO’s ability and willingness to deter REM depend on CEO power and market power of the firm, respectively. The authors also conduct a survey of marketing personnel to extend the first study by examining marketing expenditures other than advertising (e.g., market research) and the firm’s revenue management actions (e.g., sales promotions). The authors find that CMO presence reduces the propensity for REM by cutting marketing expenditures but has no impact on REM through sales promotions.