Avoid Firms with CFOs that Golf All the Time

Avoid Firms with CFOs that Golf All the Time

December 17, 2015 Academic Research Recap, Architect Academic Insights
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Chipping Away at Financial Reporting Quality

Abstract:

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.

Alpha Highlight:

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!)

CFO Golfing

Key findings from the paper:

  1. The paper finds positive correlations between CFOs’ golfing frequency and accrual errors, discretionary accruals, and unexplained audit fees.
  2. Higher CFO leisure consumption is associated with a decreased quality and quantity of information provided during the earnings conference call.
  3. 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!

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.