Does CEO agreeableness personality mitigate real earnings management?

• Main Authors: LIU, Shan, WU, Xingying, HU, Nan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Agreeableness; Business ethics; CEO personality; Real earnings management; Business Law, Public Responsibility, and Ethics; Databases and Information Systems; Leadership Studies; Numerical Analysis and Scientific Computing
• Online Access: https://ink.library.smu.edu.sg/sis_research/9156; https://ink.library.smu.edu.sg/context/sis_research/article/10159/viewcontent/CEOAgreeablenessREM_av.pdf
• Institution: Singapore Management University

Despite efforts to mitigate aggressive financial reporting, earnings management remains challenging to parties interested in inhibiting its dysfunctional effects. Using linguistic algorithms to assess CEO agreeableness personality from their unscripted texts in conference calls, we find that it is a determinant that mitigates a firm's real earnings management. Furthermore, such an effect is more pronounced when firms confront intensive market competition and financial distress and have weaker managerial entrenchment or when CEOs face stronger internal governance. Our findings persist even after we utilize several alternative real earnings management metrics and control other confounding personalities in prior earnings management studies. The subsample analysis and a two-step endogeneity controlling analysis further support that our results are not driven by the endogeneity in CEO selection process. Our study enriches the upper echelons theory, especially in the personality-situation interaction perspective, and provides insights for firms to incorporate managers' ethical-oriented personality into the mechanisms of curbing real earnings management.