Pilot-CEOs and Real Earnings Management
Abstract
The purpose of this study is to examine the relationship between a CEO’s personal risk preferences and real earnings management. Using the possession of a pilot’s license as a proxy for a CEO’s preference to bear a higher level of risk (Pilot-CEOs), I find that Pilot-CEOs are not likely to take a reckless risk and engage in real earnings management because it destroys shareholder value. However, they recognize the negative long-term consequences of missing earnings benchmarks and are willing to take a strategic risk and use real earnings management to meet or beat earnings benchmarks. As a result, these firms have stronger operating performance in the periods following the use of real earnings management. This is evidence that firms with Pilot-CEOs are most likely using real earnings management for non-opportunistic reasons such as avoiding debt covenant violations or signaling managerial competence. On the other hand, I find that overconfident CEOs that use real earnings management to meet or beat earnings benchmarks have poor operating performance in periods following the use of real earnings management. This is evidence that overconfident CEOs are most likely using real earnings management for opportunistic reasons such as job security or gaining bonuses. These results are robust to using alternative measures of operating performance and alternative methods of identifying real earnings management.
Degree
Ph.D.
Advisors
Watts, Purdue University.
Subject Area
Finance|Management|Labor relations
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