Earnings Management & the role of CEO Personality - Applying an algorithm to analyse whether conscientiousness affects real and accruals-based earnings management

Abstract

Despite extensive efforts to grasp and mitigate the problem of earnings management, research indicates that it remains a prevalent problem. We set out to investigate whether CEO personality, more specifically the trait of conscientiousness – characterised by long-term orientation, risk aversion and impulse control – plays a role in explaining the prevalence of earnings management. Using an algorithm based on the Big Five Personality traits model, we assess the personalities of 135 CEOs across 89 firms listed on NYSE and Nasdaq. The sample consists of 702 observations between the years 2012 to 2018. Our findings indicate that CEOs with low conscientiousness do more real earnings management. Thereby, we identify a new determinant of earnings management, corroborating that personality affects the level of earnings management. We find no such relationship for accruals-based earnings management, indicating that personality traits might also affect the choice of earnings management method. Consequently, we offer insights to the interplay between psychology and accounting research.