Avoid Firms with CFOs that Golf All the Time
Chipping Away at Financial Reporting Quality
- Biggerstaff, Cicero, Goldie, and Reid.
- A version of the paper can be found here.
- Want a summary of academic papers with alpha? Check out our Academic Research Recap Category.
Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm’s financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when they have lower economic incentives to work. We show further that higher levels of CFO leisure are negatively associated with a number of indicators of financial reporting quality. The use of firm fixed effects and an instrumental variable analysis suggest that the observed relations are causal. Further tests indicate that higher leisure consumption is associated with shorter conference calls with a more uncertain tone. Finally, the effects of lower quality reporting are demonstrated by results linking CFO leisure with analysts’ forecast dispersion and weaker earnings response coefficients.
Biggerstaff, Cicero and Puckett (2014) show that a CEOs’ golfing frequency is negatively correlated with firms’ operating performance and firm value. In this paper, the authors look at the relationship between a CFO’s golfing frequency and a firms’ financial reporting quality. The punchline: CFO behavior matters.
The sample consists of 385 CFOs from 2008 to 2012, and the authors collect the golfing data from the United States Golf Association (USGA).
The chart below shows the distribution of the 385 CFOs’ golf playing rounds from 2008 to 2012. The average rounds that CFOs play per year are 20. Assuming an average round takes 5 hours and the average working hours/week is 40, this is roughly equivalent to 2.5 weeks of work. The maximum rounds that a CFO played in this sample is 148 rounds (4.6 months of work, wow!)
Key findings from the paper:
- The paper finds positive correlations between CFOs’ golfing frequency and accrual errors, discretionary accruals, and unexplained audit fees.
- Higher CFO leisure consumption is associated with a decreased quality and quantity of information provided during the earnings conference call.
- Higher CFO leisure consumption is associated with higher analyst forecast dispersion and lower earnings responses.
Watch out for firms where the CFO and the CEO are always golfing!
Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)