Why and when does CFO ranking in top management team informal hierarchy affect entrepreneurial firm initial public offering fraud?

Abstract

AbstractWe build upon the approach/inhibition theory of power to explain why and when CFO ranking in top management team (TMT) informal hierarchy may be related to entrepreneurial firm initial public offering (IPO) fraud, a typical type of unethical behaviour with potential benefits and costs. Our theory explains why CFOs with high rankings in TMT informal hierarchy tend to have a high level of psychological sense of power and may pay more attention to potential benefits rather than costs of unethical behaviours, resulting in a high likelihood to engage in fraud during IPO process. We further suggest that the positive relationship between CFO ranking in TMT informal hierarchy and entrepreneurial firms IPO fraud is weakened by CEO narcissism (internal environment) and environmental dynamism (external environment), respectively. Based on a sample of Chinese entrepreneurial firms listed in growth enterprise market from 2010 to 2017, we find support for our theoretical predictions. By focusing on the ‘specialist’ executives – CFOs – the findings suggest the need to consider rankings in TMT informal hierarchy when analysing the antecedents of IPO fraud.