Are there costs to hiring an accounting expert CFO?

Darren Bernard

bern0314@uw.edu

Weili Ge geweili@uw.edu

Dawn Matsumoto damatsu@uw.edu

Sara Toynbee

stoynbee@uw.edu

University of Washington Michael G. Foster School of Business

University of Washington Paccar Hall, Box 353226

Seattle, WA 98195

First Draft: March 20, 2015

Abstract

This paper examines the effects of hiring an accounting expert CFO on firm outcomes for non-accounting related job responsibilities. We use the CPA designation to proxy for a CFO’s accounting expertise. We first provide evidence suggesting that acquiring accounting expertise requires a trade-off in terms of acquiring other skills and knowledge (e.g., finance or general management). Next we find some evidence suggesting that CPA-CFOs are less adept at managing the investor relations aspect of the CFO position; however, we find little cost to hiring CPA-CFOs with respect to firm-level outcomes on strategy, operations, and finance. It also appears that CPA-CFOs are actually paid less than their non-CPA CFO counterparts and are less likely to be promoted to the CEO position within five years. We provide some preliminary evidence suggesting that at least two factors contribute to these findings: (1) firms compensate for manager-specific weaknesses (e.g., a CPA-CFO’s lack of operation expertise) by employing management team members with compensating strengths (e.g., COOs); (2) CPA-CFOs have lower “status” (e.g., holding a degree from an elite university), which negatively influences their labor market outcomes. Taken together, our findings contribute to the literature on accounting expertise, as well as the management literature on top management teams.

                                                             Ge and Matsumoto would like to thank the Moss Adams Professorship and the PricewaterhouseCoopers Professorship, respectively, at the University of Washington for financial support.

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1. Introduction

The role of a CFO is multi-faceted. In addition to having primary responsibility over

the accounting and internal control functions of a business, CFOs are also increasingly given

oversight over a variety of other activities of the firm including mergers and acquisitions,

investor relations, information technology, and other operational functions. To be successful

in fulfilling this wide range of responsibilities likely requires a broad knowledge base and

varied skill set. Prior research primarily focuses on CFOs’ accounting or finance expertise

and finds improvements in firm outcomes along these dimensions. For example, Li et al.

(2010) find that CFOs with financial expertise are less likely to have adverse SOX 404

opinions and Aier et al. (2005) find a similar effect of CFO financial expertise on the

probability of an accounting restatement. These findings suggest benefits to hiring an

accounting expert CFO; however, given the varied job responsibilities of a CFO, it is possible

accounting expert CFOs are less likely to have the knowledge and skills to effectively

manage the non-accounting related functions of the CFO position. The purpose of this study

is to investigate whether hiring an accounting expert CFO results in less positive outcomes on

non-accounting related dimensions. Thus, we ask the question: Are there costs to hiring an

accounting expert CFO?

Our analysis is based on a sample of over 6,000 CFOs with employment hire dates

between January 1, 1999 and December 31, 2008 as reported on BoardEx. We proxy for a

CFOs accounting expertise by identifying those CFOs with a CPA designation (hereafter

CPA-CFOs). This proxy is easy to identify in a large sample and is an objective measure of

accounting expertise. While the definition likely excludes some accounting expert CFOs

who do not hold a CPA license, it is unlikely to include CFOs who are not accounting experts

because the education and experience requirements necessary to become a CPA are generally

quite stringent. We conjecture that fulfilling these requirements leads to CPA-CFOs having a

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narrower set of educational and career experiences than non-CPA CFOs. We first provide

evidence on this conjecture by examining the educational and career backgrounds of these

two groups of CFOs. Consistent with our conjecture, we find that, at the date of hire, CPA-

CFOs 1) are less likely to have a MBA, 2) are less likely to hold a CFA designation, 3) are

less likely to have worked at an investment bank, 4) have fewer years working in a public

company, and 5) are less likely to sit on the board of a public company. Overall, this

evidence suggests that acquiring accounting expertise requires a trade-off in terms of

acquiring other skills and knowledge that are useful in being a CFO of a US public company.

Our main analyses examine whether this trade-off leads to lower quality decisions in

non-accounting related functions for CPA-CFOs. However, to address the possibility that

firms that hire CPA-CFOs are fundamentally different than those that do not, we first

examine the determinants of the decision to hire a CPA-CFO. Consistent with prior research,

we find that firms are more likely to hire accounting expert CFOs following an accounting

restatement and in the years immediately after the implementation of SOX. We also find that

firms with COO positions are more likely to hire an accounting expert CFO and firms with

another management team member with accounting responsibilities (e.g., Chief Accounting

Officer) are less likely to hire a CPA-CFO. These findings suggest that firms might

compensate for weaknesses in certain top management team members’ skill set by hiring

other team members with offsetting strengths. We also find that larger firms, more highly

levered firms, and firms with higher book-to-market ratios are all significantly less likely to

hire CPA-CFOs. We include these determinants in our subsequent analyses to control for the

impact of these firm differences on the various firm outcome measures that we examine.

We focus on four non-accounting related job responsibilities that CFOs face and that

CPA-CFOs could be disadvantaged in performing relative to their non-CPA CFO

counterparts: 1) strategy-related, 2) operations-related, 3) investor-relations related, and 4)

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finance-related. We identify firm-level outcomes that proxy for the effectiveness with which

a CFO manages these responsibilities: 1 1) market reactions to merger and acquisition

announcements (strategy-related), 2) investment efficiency (strategy and operations-related),

3) operational efficiency ratios (operations-related), 4) analyst following (investor relations-

related), and 5) market reactions to share repurchase announcements (finance-related). Our

prediction is that firms employing CPA-CFOs will exhibit poorer outcomes on these

dimensions than firms employing non-CPA CFOs, controlling for the determinants of hiring

a CPA-CFO (discussed previously).

The results of our analysis suggest few significant differences between firms

employing CPA-CFOs and firms employing non-CPA CFOs. We find no difference in the

market reaction to mergers and acquisitions, suggesting that the quality of these strategy-

related decisions are similar between CPA-CFOs and non-CPA CFOs. Similarly, we find no

significant evidence that firms that hire CPA-CFOs are more likely to over- or under-invest,

using the investment efficiency measure developed by Richardson (2006), and find only

marginally lower operating efficiency using the asset turnover ratio. This evidence suggests

that CPA-CFOs are similar to non-CPA CFOs in their influence on the operations of the firm.

Further, there is no significant difference in the market reaction to share repurchase

announcements. The one dimension on which we find significant differences between CPA-

CFOs and non-CPA CFOs is in the number of analysts following the firm. Specifically, the

change in industry-adjusted analyst following after the hiring of a CPA-CFO is significantly

                                                            1 These predictions assume that manager-level characteristics can influence firm-level outcomes, which prior research suggests is possible (Bertrand and Schoar 2003; Ge et al. 2011; Bamber et al. 2010; Yang 2012; Dyreng et al. 2010). Given that the CFO’s importance in the organization has been increasing over time, it is reasonable to expect that CFO characteristics are related to key firm-level outcomes in addition to those related to financial reporting.

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lower than after hiring a non-CPA CFO. This result suggests that CPA CFOs are less adept

at managing the investor relations aspect of the CFO position.2

Overall, our analyses suggest little cost to hiring CPA-CFOs in terms of firm-level

outcomes on non-accounting related job functions. Given that prior research suggests that

hiring an accounting expert CFO provides benefits in terms of accounting-related firm

outcomes, these results suggest that hiring a CPA-CFOs potentially provides net benefits to the

firm. If this is the case, we would expect these CPA-CFOs to be paid more and to have better

subsequent labor market outcomes. However, in additional analyses, we find that CPA-CFOs

are actually paid less than their non-CPA CFO counterparts and are less likely to be promoted

to CEO within five years.

There are three possibilities that might explain our findings. First, it is possible that

firms compensate for any manager-specific weaknesses by employing management team

members with compensating strengths. We find some evidence consistent with this

compensation effect. In particular, we find that firms that hire CPA-CFOs are more likely to

under-invest and have lower operational efficiency, measured using sales per employee,

when there is no COO position within the firm. In contrast, for firms that employ a COO,

there is no negative effect on either of these dimensions associated with hiring a CPA-CFO.

Second, it is possible labor market outcomes are influenced by an executive’s “status”

(Erkens and Bonner 2013) and not his/her true benefit to the firm. In supplemental analysis

we find that CPA-CFOs are less likely to have graduated from an elite university, consistent

with their lower status negatively impacting their labor market outcomes. Moreover, a

CFO’s elite status is positively associated with both his/her compensation and the likelihood

                                                            2 We also repeat all of our previous analyses using a stricter measure of accounting expertise (i.e. identifying those CFOs with a CPA designation but without an MBA). Overall, the results based on this stricter measure are largely similar to the previously reported results. There is, however, slightly more evidence in support of the negative effects of CPA-CFOs on non-accounting related job responsibilities. See our discussion of this robustness test in Section 5.

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of being promoted to CEO; controlling for elite status weakens the negative association

between CPA-CFO and these variables. Third, we cannot eliminate the possibility that our

analyses of firm-level outcomes fail to capture some intangible managerial skill that CPA-

CFOs lack and that warrants their lower pay and worse labor market outcomes.

Our study contributes to our understanding of the costs and benefits of accounting

expertise. Prior studies highlight the benefits to the firm of employing accounting expert

CFOs and board members. However, given the breadth of job responsibilities faced by CFOs,

it is reasonable to consider whether developing accounting expertise comes at a cost – that is,

at a cost of having less expertise in areas such as business strategy, operations, and finance.

To our knowledge, we are the first study to examine whether there are costs to hiring

accounting expert CFOs. Our evidence should be of interest to boards of directors in their

hiring decisions as well as to managers in considering their career development.

We also add to the management literature on top management teams (TMTs) by

examining the relation between TMT structure and individual manager demographics. Most

TMT studies focus on the aggregate individual backgrounds of the TMT members without

considering an individual manager’s role in the TMT (see Menz (2012) for a review of this

literature). Our finding that the existence of a COO position and a top accounting manager

position is associated with the accounting expertise of the CFO suggests that the demographic

background of individual managers is relevant in organization structure.

In the next section we discuss the evolution and responsibilities of the CFO position

and our hypotheses related to the effect of accounting expertise on the non-accounting related

job functions of the CFO. We discuss the data used in our study and how we formed our

sample in section three. Section four presents the results of our analyses. In section five we

discuss results and present some additional analyses. We conclude our paper in section six.

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2. Hypothesis Development

2.1 The role of CFOs in the organization

Historically, the role of the corporate finance function within an organization was

relatively limited – focusing on accounting and finance-related activities such as financial

reporting, internal audit, tax, and treasury activities. Over the past several decades, however,

the importance of the finance function has increased, leading to the elevation of the top finance

manager to an executive level position (i.e., the creation of the CFO position). In his

longitudinal analysis of over 400 large U.S. corporations from 1964-2000, Zorn (2004) finds

that none of the companies had a CFO position in 1964, whereas 80% of companies did by the

year 2000.3

More recently, survey and anecdotal reports suggest that the rise in importance of the

CFO has continued (Favaro 2001). In particular, CFOs appear to be playing increasingly

larger roles in the development and implementation of corporate strategy. For example, in a

recent survey of Fortune 1000 CFOs, 81% indicated that their companies viewed the finance

function as a “strategic business partner” (Consero 2013). In another survey of CFOs, 75%

indicated that they spend 50% or more of their time on strategic aspects of their role (EY

2010). Further, Groysberg et al. (2011) argue that “the top finance job now involves helping

the CEO and business heads find new opportunities and assess their strategic and financial

merits and risks.” 4 This anecdotal evidence suggests that the role of the CFO within

organizations has broadened beyond the traditional financial reporting and treasury functions

                                                            3 The reason for this elevation is multi-faceted – theories include capital dependency (Prechel 2000), a shift toward a finance conception of the firm (viewing the firm as a system of investment, rather than simply a production-function) (Fligstein 1993), as well as the result of a regulatory change in accounting rules (specifically, SFAS 33 requiring current cost accounting) (Zorn 2004). 4 This trend is consistent with overall trends in the responsibilities of “functional” top management team (TMT) members (e.g., CFOs, CIOs, CTOs, CSOs, CMOs, etc.). In his interdisciplinary review of the academic literature, Menz (2012) concludes that: “most studies find that the functional executive is not just the head of an organization function; a significant part of the role comprises strategic decision making and leadership.”

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as CFOs are increasingly expected to provide input and direction on the strategy and overall

operations of the organization.

In addition, CFOs often play an important role in managing external stakeholders,

particularly with respect to managing investor communications (Groysberg et al. 2011). The

role of CFOs in investor relations is apparent by their prominent role in corporate conference

calls – Li et al. (2014) find that comments by the CFO comprise 33% of the text spoken in

their sample of conference calls.5 Moreover, in the EY survey referenced above over two-

thirds of the CFOs surveyed indicated that they act as the “face of the organization on all

issues related to its overall performance.” Overall, the evidence suggests that CFOs’

responsibilities have become increasingly broad and complex over time.

2.2 The effect of CFO backgrounds

Given this broadening in CFO responsibilities, it is important to understand how

CFOs’ backgrounds affect their ability to successfully fulfill their multifaceted job functions.

Prior research suggests that the background of CFOs can impact their effectiveness in

managing the accounting-related responsibilities of their position, such as monitoring the

financial reporting and internal control functions (e.g., Aier et al. 2005; Li et al. 2010). For

example, Li et al. (2010) show that firms are more likely to hire a CFO with financial

reporting expertise after disclosing ineffective internal controls, and improving the extent of

this expertise in the CFO position consequently increases the likelihood of remediating

internal control deficiencies. In addition, the stock market appears to view accounting

expertise as value-enhancing – DeFond et al. (2005) show that the stock market reacts

positively to hiring an accounting expert to an audit committee but not to hiring a non-

accounting financial expert.

                                                            5 By comparison, CEO comments comprise 48% of text spoken during their sample of conference calls.

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Although CFOs with accounting expertise are likely to be more adept at handling the

financial reporting/internal control aspects of their jobs, it is unclear whether this background

provides the CFO with the broad knowledge base and varied skill set that are likely necessary

to effectively meet the other aspects of their job. We proxy for accounting expertise by

identifying CFOs with a CPA designation. While it is possible to be an accounting expert

without being a licensed public accountant, the CPA designation is easy to identify in a large

sample and is an objective measure of accounting expertise.6 Further, we conjecture that

because of the educational and experience requirements necessary to become a licensed

public accountant, CFOs holding this designation have likely had a narrower set of

educational and career experiences. Prior research provides some evidence of this narrower

focus – in their sample of CFOs, Ge et al. (2011) report a negative correlation between

having a CPA and having an MBA. In Section 3, we further explore the educational and

career experiences of CPA-CFOs relative to non-CPA CFOs.

Assuming our conjecture that CPA-CFOs tend to have more focused backgrounds is

reasonable, the question becomes: What effect, if any, does this have on their ability to meet

the non-accounting related aspects of their job? We develop our hypotheses around four non-

accounting related job responsibilities: 1) strategy-related, 2) operations-related, 3) investor

relations-related, and 4) finance-related. We focus on these categories because anecdotal

reports (EY 2010, Consero 2013, Groysberg et al. 2011) suggest these activities are

commonly within the sphere of the CFO’s influence, if not directly within the scope of

his/her job responsibilities. We recognize that many of the responsibilities discussed below

                                                            6 Prior literature has also used experience at public accounting firms to capture accounting expertise (e.g., Li et al. 2010). We choose to measure accounting expertise using the CPA designation to ensure we do not miss accounting-based experience at non-Big 4 firms as well as to avoid classifying managers with experience in non-accounting related functions at the Big 4 firms (e.g., consulting) as having accounting expertise.

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are multi-faceted and could be categorized along more than one of these four dimensions but

we use these categories to facilitate our discussion.

In developing our hypotheses, we assume that manager-level characteristics (e.g.,

educational background) will manifest in firm-level outcomes, as suggested in upper

echelons theory (Hambrick and Mason, 1984). Specifically, upper echelons theory proposes

that top managers’ individual characteristics have an effect on how they interpret their

situations and therefore, impact their decisions. Prior research has provided evidence in

support of the upper echelons theory in various decision contexts. It appears that manager-

level characteristics influence firms’ performance and investment decisions (Bertrand and

Schoar 2003), management forecast strategies (Bamber et al. 2010; Yang 2012), financial

reporting practices (Ge et al. 2011), the use of language in conference calls (Davis et al.,

2015), and tax aggressiveness (Dyreng et al. 2010).

Our focus is on how the specialized backgrounds of CPA-CFOs impact the non-

accounting related aspects of their job. However, it is unclear whether a CPA-CFOs ability

to effectively manage the non-accounting related aspects of their job will manifest in

observable firm-level outcomes (e.g., in market reactions to mergers or acquisitions). We

recognize that these non-accounting related job responsibilities of CFOs broadly overlap with

those of CEOs and other executives. Firm-level decisions are a joint effort of the top

management team. Therefore, if the marginal effect of CFOs on non-accounting related

outcomes is small or if firms take actions to compensate for the weaknesses in a CPA-CFOs

background (e.g., by hiring a COO), it is possible we will not observe an impact on firm-level

outcomes associated with hiring a CPA-CFO.

2.3 Strategy-related CFO responsibilities

Although setting the strategic vision of the organization is largely the purview of the

CEO, the CFO is expected to provide insight and analysis to support the CEO’s strategic

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planning. Such analysis might involve guiding evaluations of merger and acquisition

decisions or potential expansion plans. Prior research suggests that managers’ backgrounds

impact how they perceive situations in their organization, which ultimately influences their

strategic decisions (Hambrick and Mason 1984). For example, Hitt and Tyler (1991) find

that managers’ educational and functional backgrounds impact their evaluation of potential

acquisition targets. Although their analysis does not specifically examine whether a

functional background in accounting influences managers’ strategic decisions, their evidence

suggests that educational and functional backgrounds matter for these choices. Because

CPA-CFOs are more likely to have accounting-focused educational and career experiences,

we hypothesize that they are less likely to have experience with evaluating mergers and

acquisitions and investment valuation-type decisions in general.7 On the other hand, non-

CPA CFOs are more likely to have either finance-focused or general management related

experiences (e.g., having MBAs) (Ge et al., 2011). As a result, we expect CPA-CFOs’ ability

to guide the strategic decisions of the organization to be lower than that of non-CPA CFOs,

resulting in lower quality strategic decisions by the firm, which leads to our first hypothesis:

H1: Firms with CPA-CFOs make lower quality strategic decisions than firms with non-CPA CFOs.

We form two proxies for the quality of the firm’s strategic decisions. First, we

examine the announcement period returns to the first three mergers and acquisitions

undertaken by the firm during the CFO’s tenure. This proxy only captures the quality of

mergers and acquisitions that are undertaken (and not those that are forgone). Second, we

examine the efficiency of the overall investments made by the firm using the proxy

developed by Richardson (2006). Specifically, we assess the extent to which CPA-CFOs are                                                             7 Brochet and Welch (2011) find that CFOs with “transaction experience” (e.g., experience in investment banking, private equity, venture capital, and management consulting) report goodwill that is more value-relevant, consistent with this type of experience resulting in higher quality valuations in an acquisition. As reported in Section 3, CPA-CFOs are significantly less likely to have investment banking experience, supporting the idea that they will have less experience with valuation-type decisions.

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more likely to under- or over-invest – a measure of the quality of their strategic investment

decisions.

2.4 Operations-related CFO responsibilities

CFOs are also increasingly given operational responsibilities such as authority over

the information technology (IT), property, and logistic functions of the organization (EY

2010). These functions are primarily concerned with improving the efficiency of the

organization and we expect that experience managing a business unit (e.g., the plant of a

manufacturing firm) would benefit a CFO in effectively monitoring these functions. Having

an educational background or work experience in IT or operations management also likely

provide additional benefits to a CFO in improving the efficiency of the firm by ensuring

resources are efficiently directed to various business units. To the extent that CFO CPAs are

less likely to have these educational and career experiences, we predict that the operational

efficiency of the firm will be lower.

H2: Firms with CPA-CFOs have lower operational efficiency than firms with non-CPA CFOs

We proxy for operational efficiency using two efficiency ratios – asset turnover and

sales per employee. Asset turnover is the traditional ratio used to capture the firms’ ability to

generate sales with a given asset base. We include sale per employee because asset turnover

may be less relevant for firms that rely less on physical assets and more on human capital

(e.g., technology companies). We also note that the investment efficiency measure discussed

previously with respect to H1 as a proxy for the quality of a firms strategic decisions might

also represent the degree of operational efficiency of the firm.

2.5 Investor relations-related CFO responsibilities

The goal of investor relations activities is to garner investor interest by effectively

communicating the strategy, plans, and performance of the firm both directly to investors and

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through intermediaries such as financial analysts. CFOs are frequently involved in these

communications, playing a prominent role in corporate conference calls (Li et al. 2014) and

building and maintaining strong relationships with the investment community and media

(Favaro 2001). 8 To effectively communicate with external stakeholders likely requires

“softer” skills such as oral communication and presentation skills, which CFOs’ past

educational and career experiences may be less likely to cultivate. Consistent with that

notion, in the EY survey of CFOs, the area that respondents indicated they most needed to

improve was in communication skills (presentation skills was the third highest ranked area

needing improvement). In addition, cultivating relationships with financial analyst and

institutional investor requires knowledge of these constituencies – the information they

require, the incentives they face, etc.

Whether CPA-CFOs will be more or less adept at managing these stakeholders relative

to their non-CPA CFOs counterparts is debatable. On the one hand, as with many client-

facing jobs, public accounting experience requires frequent one-on-one interactions with

clients as well as occasional presentations in front of small audiences (e.g., the audit

committee). These experiences likely improve an individual’s communication skills.

However, other career paths have similar requirements (e.g., management consulting and

investment banking). Moreover, CPA-CFOs likely know less about the institutional

investment industry, relative to CFOs with an investment banking or asset management

background, and are less likely to have Wall Street connections. They are also less likely to

have a broad understanding of the strategic direction of the company or industry and/or an in-

depth understanding of the operations of the firm relative to CFOs with general business unit

                                                            8 According to a report by McKinsey & Co in January 2013, the CFO has become “prominent as the voice of the company in investor relations and in communications to the board.” In addition, based on a 2012 survey of 736 investor relations executives, the National Investor Relations Institute (NIRI) reports that 65 percent of investor relations managers report to the CFO at their company.

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experience. For these reasons, we conjecture that CPA-CFOs are at a disadvantage in

cultivating relationships with investors and analysts and hypothesize the following:

H3: Firms with CPA-CFOs are less effective at managing investor relations activities than firms with non-CPA CFOs.

Since garnering analyst attention is one the primary goals of investor relations

(Bushee and Miller 2012), we proxy for the effectiveness of investor relations activities by

the number of analysts following the firm.

2.6 Finance-related CFO responsibilities

Traditionally, the CFO position was responsible for accounting and finance-related

functions within the firm. We consider responsibilities such as preparing regulatory filings,

maintaining internal control systems, and managing the budgeting process as “accounting-

related”. In contrast, we consider responsibilities such as determining the company’s

dividend and capital return policy and optimal capital structure as “finance-related”. To the

extent that CPA-CFOs are less likely to have expertise in finance related matters, we

hypothesize that CPA-CFOs’ educational and career experiences would make them

particularly effective at the accounting-related responsibilities but less effective at the

finance-related responsibilities, leading to our fourth hypothesis:

H4: Firms with CPA-CFOs are less effective at managing finance-related activities than firms with non-CPA CFOs.

Our measure of finance-related activities focuses on firms’ stock repurchase programs.

Specifically, we measure the short-window market reaction to firm announcements related to

their stock repurchase programs. Share repurchases are an important mechanism for

returning capital to shareholders and reflect managers’ ability to manage the company’s

current and future financing needs. If CPA-CFOs are relatively less adept at managing these

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finance-related activities, then we would expect the announcement returns to be lower for

firms with CPA-CFOs than for firms with non-CPA CFOs.

3. Data and sample selection

Our primary source of information on CFOs is BoardEx, an international data

provider that uses public disclosures to track executives’ educational and employment

backgrounds. We obtain financial data from Compustat and executive compensation data

from Execucomp. We use the BoardEx employment file to select a sample of CFO hires at

publicly traded US companies with employment hire dates between January 1, 1999 and

December 31, 2008. BoardEx’s coverage starts in 1999, and we end the sample period in

2008 because we require multiple years of data after the employment hire date to conduct a

number of our empirical tests. We identify CFOs by searching for job titles that include the

term “CFO” but do not include the terms “Division”, “Region”, “Co-CFO”, “Deputy CFO”,

or “CEO.” We also remove firm-years in which the firm has multiple CFO hires in the same

year. We impose these restrictions to ensure the sample consists of corporate-level CFOs who

were neither subordinate to other executives in the finance function nor serving on an interim

basis.

For approximately 40% of our sample, Boardex specifies the date of hire at a month-

year or year level, not at the daily level. For these observations, we assume that the executive

was hired at the end of the period for which the hire date is defined in Boardex. For example,

if Boardex lists the hire date as October 2003, we assume a hire date of October 31, 2003,

and if the hire date is listed as 2003, we assume that the hire date is December 31, 2003. This

“end-of-period” assumption ensures that we do not mistakenly attribute firm outcomes to

executives that preceded the CFOs in our sample. Finally, we require that each executive in

the sample remains employed by the company in the CFO position for a full fiscal year after

the hire date (hereafter the “year after hire”). This selection choice ensures that the executive

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is employed at the company for a sufficient period of time to have an impact on firm

outcomes.

Table 1, Panel A summarizes the sample selection procedure. In addition to the

above-mentioned sample selection criteria, we also require our sample to have data on total

assets in Compustat (in the year after hire). Our selection criteria yield a final sample of

6,877 CFO hire observations. Due to the limited availability of data for control variables and

certain dependent variables, however, the actual number of observations is generally lower in

our tests.9

In Panel B of Table 1, we present an overview of our sample composition over the

sample period. Our sample consists of an average of 688 CFO hires per year. On average,

49.4 percent of CFOs hold a CPA. The proportion of these CFOs holding a CPA has

increased gradually from 42.6 percent to 55.1 percent from 1999 until 2006, after which the

proportion of CFOs hired with a CPA declined slightly to 49.3 percent in 2008. The increase

in the percentage of hiring CFOs with a CPA in the 1999-2006 period might be reflective of

the increasing demand for CFOs with accounting expertise subsequent to the disclosure of

corporate accounting scandals and regulation reforms (SOX) during that time period.

[Table 1]

4. Empirical Results

4.1 CFO characteristics and background

Table 2 presents descriptive statistics of CFO characteristics for our sample of CFO

hires and the financial variables used in our main tests.10 Variables are defined in Appendix

                                                            9 Specifically, in addition to Compustat and Execucomp, the calculation of some variables requires returns data from CRSP, M&A deal information from Thomson SDC Platinum, analyst coverage from I/B/E/S, restatement data from Audit Analytics, and other executive related information from Boardex. We discuss measurement of these variables further in the following section. 10 We describe the variables used in our main tests (determinants of hiring a CPA-CFO and firm-level outcomes) in Sections 4.2 and 4.3.

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A. We present these statistics for the full sample (Panel A) and then separately for CPA-CFO

hires and non-CPA CFO hires (Panel B). As mentioned earlier, 49.4 percent of the CFOs in

our sample are CPAs. 38 percent of the CFOs have MBA degrees, but only seven percent of

the CFOs have experiences in investment banking and one percent hold a CFA designation.11

The average age of CFOs is 47. In addition, 27 percent of the CFOs in our sample have prior

experience as a CFO at a U.S. public company; 54 percent of CFOs in our sample were hired

externally; the average proportion of the CFOs’ prior years of experience that was spent at a

U.S. public company is 31 percent; and the average tenure of these CFOs staying at the CFO

position of the sample firm is 4.5 years.

The descriptive statistics in Panel B of Table 2 provide evidence of potentially

important trade-offs in the backgrounds and skill sets of CFOs. As expected, CPA-CFOs are

significantly less likely to have an MBA degree, prior investment banking experience, or hold

a CFA qualification than non-CPA CFOs. For example, 47 percent of non-CPA CFOs hold

an MBA degree, while only 29 percent of CPA-CFOs have received an MBA degree. The

difference is statistically significant at the one percent level. This result is consistent with the

significantly negative correlation between a CFO’s CPA background and MBA background

shown in Ge et al. (2011). CPA-CFOs tend to be younger, have a shorter tenure, and are more

likely to be hired externally. It also appears that CPA-CFOs are less likely to have a board

seat at a public company than non-CPA CFOs at the time of hire (12 percent versus 16

percent; p-value < 0.01), consistent with the notion that CPA-CFOs might lack general

operational and management expertise that is desirable for a board position. Finally, the

                                                            11 We determine whether a CFO has experience in investment banking based on whether the CFO has been employed by one of the investment banks on a list compiled using data from Thomson SDC Platinum. Specifically, for each year from 1962 (the earliest year of data availability on SDC) through 2008, we obtain the names of the top 50 investment banks ranked by mergers and acquisitions, debt issuance, or equity issuance fees. We then match by hand the investment bank names obtained from this step to those listed in the BoardEx employment file to capture all variations of the investment bank names (including subsidiary names) listed in BoardEx. The final list includes 2,165 separate investment bank names.

17  

proportion of the CFO’s total years of experience (as listed on Boardex) that was spent at a

US public company is significantly less for CPA-CFOs than non-CPA CFOs. This difference

suggests that CPA-CFOs might have less operational and managerial knowledge that

executives would typically obtain from working at a public company.

[Table 2]

Table 3 provides the correlations between our variables representing CFO

characteristics discussed in Table 2. Generally, the inferences are similar to the inferences

from Table 2. Table 3 shows that CPA-CFOs are less likely to have an MBA degree, prior

investment banking experience, or hold a CFA qualification. Further, CPA-CFOs have less

experience in public companies and are less likely to hold an existing board seat at a public

company at the time of hire. In contrast, CFOs with an MBA degree typically appear to have

more general management and finance experience, as evidenced by the significantly positive

correlations between MBA, investment banking experience, CFA qualification and prior

CFO, U.S. public company, and board experience.12

Taken together, the descriptive statistics in Table 2 and pairwise correlations in Table

3 provide evidence of potentially important trade-offs in the backgrounds and skill sets of

CFOs. Although CPA-CFOs are likely to possess greater financial reporting expertise, the

evidence suggests that this expertise is typically at the expense of finance and general

operational and managerial experience.

[Table 3]

4.2 Determinants of hiring a CPA-CFO

Given the descriptive evidence in Tables 2 and 3, we expect that firms consider the

tradeoffs in the backgrounds and skillsets of potential CFOs when making hiring decisions.

                                                            12 The results in Table 3 also reveal expected associations between other executive characteristics and background variables. For instance, CFO age is positively correlated with prior CFO experience, the likelihood of holding a board seat on a public company at the time of hire, and being an external hire at the sample firm.

18  

In this section, we examine several determinants of hiring a CPA-CFO and expect systematic

associations between firm characteristics and the type of CFO the firm hires based on the

perceived relative costs and benefits of financial reporting expertise to the firm. Specifically,

we estimate the determinants of hiring a CPA-CFO using the following logistic regression

model where CPA is equal to one if the newly hired CFO holds a CPA:

,

(1)

Prior literature suggests that firms have strong incentives to hire CFOs with

accounting expertise in the presence of financial reporting problems (Li et al. 2010).

Therefore, we include the indicator variable , which equals one if the firm filed a

restatement in the three years prior to the CFO hire date. We obtain the restatement data from

Audit Analytics. We also expect that the incentive to hire a CPA-CFO is stronger during the

initial adoption years of the Sarbanes-Oxley Act (SOX), as firms were required to comply

with the new internal control disclosure requirements under Section 404 of SOX that became

effective in 2004. To examine this effect, we include an indicator variable equal to one for

CFO hires that occurred between 2004 and 2006, and zero otherwise ( ).

The accounting expertise of the existing management team is also likely to affect the

decision to hire a CPA-CFO. Hiring a CFO with accounting expertise might be less important

when there is already accounting expertise on the management team. We therefore include

two variables to control for the level of financial reporting expertise at the firm prior to the

CFO hire. First, we include the indicator variable, , which equals one if BoardEx

indicates the employment of an individual with “Accounting” or “Controller” in his/her title

(e.g., Chief Accounting Officer, Principal Accounting Officer) at the firm as of the hire date

of the CFO, and zero otherwise. Second, we include the indicator variable , which

equals one if the CEO as of the hire date of the CFO has a CPA and zero otherwise. We also

19  

include an indicator variable equal to one if the firm has a Chief Operating Officer (COO) at

the time of hire to proxy for the relative importance of hiring a CFO with operational versus

financial reporting expertise. We expect that hiring a CFO with accounting expertise is less

costly when a firm already has a COO. Finally, we include controls for lagged firm size,

performance, book-to-market ratio, and leverage. Descriptive statistics of our determinants

variables are reported in Table 2.

We estimate Equation (1) on our full sample of CFO hires, first including only the

variables for which we have complete data ( , , , , ), and then

separately for the subsample of CFO hires for which we have data for all control variables.

Results are presented in Table 4, where coefficient estimates are provided in Columns (1) and

(3) and average marginal effects are provided in Columns (2) and (4).

The results in Table 4 are consistent with the notion that firms are significantly more

likely to hire CPA-CFOs after events that increase the benefits of having financial reporting

expertise in the executive team. Specifically, the model coefficients in Columns (1) and (3)

and the respective average marginal effects in Columns (2) and (4) are positive and

significant for both and . The average marginal effects in Column (4) suggest

that firms are 4.5% more likely to hire a CPA-CFO after a restatement and 4.4% more likely

during the initial SOX implementation years. The economic magnitude of these marginal

effects is considerable given that the average likelihood of hiring a CPA-CFO is 0.49 (Table

2 Panel A).

The coefficients on the remaining variables are broadly consistent with our

expectations. We find that the presence of an accounting-focused position on the

management team lowers the probability of hiring a CPA-CFO, and the existence of a COO

position increases the probability of hiring a CPA-CFO. Interestingly, however, the presence

of a CEO with a CPA increases the probability of hiring a CPA-CFO. Although this result is

20  

contrary to the notion that firms hire accounting expert CFOs when they lack this expertise

on their management team, it is consistent with social psychology research that suggests

biases toward demographically similar individuals (see Westphal and Zajac 1995 for a review

of this literature). We also find that larger firms, more highly levered firms, and firms with

fewer growth opportunities (i.e., higher book-to-market ratio) are all significantly less likely

to hire CPA-CFOs. To alleviate the concern that it is the firm characteristics leading to the

hiring of a CPA-CFO that affect the firm-level outcome variables, these determinants serve

as our primary vector of control variables in all of our analyses of the consequences of hiring

a CPA-CFO discussed in the following sections.

Overall, these findings reinforce the notion that CPA-CFOs are valued for their

accounting expertise, and companies respond to shocks to demand for financial reporting

expertise by hiring CPAs as CFOs. Despite these financial reporting benefits, fewer than half

of the CFO hires in our sample have CPAs, suggesting that there are costs to hiring CPA-

CFOs. We investigate these costs in the following section.

[Table 4]

4.3 Consequences of hiring a CPA-CFO

In Section 4.1, we provide evidence of different types of backgrounds and skillsets of

CFOs within our sample. Specifically, we illustrate that although CPA-CFOs are likely to

possess greater financial reporting expertise, on average, this expertise is at the expense of

finance and general operational and managerial experience. In this section, we examine the

costs to the firm of this tradeoff.

4.3.1 Strategic decisions

We begin with testing our first hypothesis that firms with CPA-CFOs make lower

quality strategic decisions than firms with non-CPA CFOs. We examine the quality of

merger and acquisition decisions by examining the first three M&A announcements

21  

following the CFO hire.13 We measure the quality of the acquisition using the market-

adjusted stock returns cumulated in the three-day window around the announcement of a

merger or acquisition announcement period returns (i.e., days [-1, +1], where 0 is the

announcement date). We expect a more positive stock market reaction to the announcement

of M&A, on average, if it is of higher quality. We estimate the following model:

_ 3 ,

_ __ _

_ (2)

In Equation (2), the subscript t refers to the year of hiring the CFO. Following prior

research on merger and acquisitions (e.g., Moeller et al. 2004), we restrict the tests to

acquisitions after which the acquirer owns more than 50% of the target’s shares. We also

include several control variables that measure key characteristics of the deal, including the

cash holdings of the acquirer (Cash), indicator variables equal to one if the target company is

a private company (Target_Private) or public company (Target_Public),14 the proportion of

the deal value paid in cash (Pct_Cash), an indicator variable equal to one if the acquirer and

target do not share the same 4-digit SIC code (Conglomerate), the value (in millions) of the

transaction (Value_Trans), and the relative size (transaction value divided by the lagged

market capitalization of the acquirer) of the deal (Relative_Size). Following H1, if CPA-

CFOs make lower quality strategic decisions, we expect will be significantly negative. 

The results from estimating Equation (2) are reported in Table 5, Panel A. The

coefficient estimates on CPA are insignificant in both columns. Inconsistent with H1, it does

                                                            13 We do not use M&A deals over a longer time horizon because CPA-CFOs might make higher quality strategic decisions over time as they acquire these skills while working at the firm, which would reduce the power of our test. 14 The M&A targets in the sample are public companies, private companies, or subsidiaries. Thus, the indicator variable Target_Public (Target_Private) captures the average difference in announcement returns between acquisitions of public (private) companies and subsidiaries.

22  

not appear that CFO’s accounting expertise is associated with the perceived quality of

M&As. With respect to the control variables, the stock market return is lower when the

acquirer is larger, the acquirer is less levered, the target firm is public, the value of the

transaction is larger, and the relative size of the deal is lower. These results are broadly

consistent with those in prior research (e.g., Moeller et al. 2004).

We next examine whether CPA-CFOs make less efficient investment decisions during

the first year following their hiring (see Figure 1 for our variable measurement timeline). We

follow Richardson (2006) and estimate investment efficiency by examining the residual from

an expected investment model. Specifically, we estimate the following regression for all

firms with necessary data on Compustat and CRSP:

/ ∑

∑ (3)

Investment is the sum of capital expenditure, acquisitions, and research and

development expenditure, less sales of property, plant and equipment, plus depreciation. The

subscript year t refers to the year of hiring the CFO. We take the residual (ε) from Equation

(3) as a measure of investment efficiency and merge it back to our sample of CFO hires for

their first full year as CFO (see Figure 1). We estimate the propensity of CPA-CFOs to make

inefficient investment decisions by classifying observations as under-(over-) investing when

the residual falls in the bottom (top) quartile of our sample and estimate the following

multinomial logistic regression, with the second and third quartiles serving as our base group:

Pr , ,

(4)

We include the residual from Equation (3) in year t-1 (Residual investmentt-1) to

control for firm-specific tendencies to over- or under-invest that are unrelated to the

23  

characteristics of the CFO hired in year t. If CPA-CFOs make lower quality strategic

decisions, as we posit in H1, we expect to be significantly positive. We present the results

of estimating Equation (4) in Panel B of Table 5. The coefficient estimates on CPA are

statistically insignificant for both the likelihood of underinvestment and the likelihood of

overinvestment.

Taken together, the above results do not suggest that firms with CPA-CFOs make

lower quality strategic decisions than firms with non-CPA CFOs. Thus, we do not find

evidence to support H1. We discuss possible explanations for these null results in Section 5.

[Table 5]

4.3.2 Operational efficiency

In H2, we predict that firms with CPA-CFOs have lower operational efficiency than

firms with non-CPA CFOs. As mentioned in Section 2, we proxy for operational efficiency

by the sales generating ability of a firm’s resources – assets and employees. Specifically, we

examine the asset turnover ratio (ATO) and the sales per employee ratio (Sales/Employee).

We estimate the following model:

. . ∆ , ∆,

,

(5)

To capture the effect of CPA-CFO hires on the operating efficiency ratios, we

measure the change in these ratios from the end of the fiscal year prior to the hire year to the

first full fiscal year in which the CFO was hired at the firm. To alleviate industry and year

specific effects on these ratios, we adjust all the financial variables (∆ATO, ∆Sales/Employee,

24  

LnMVE, ROA, BM, and Lev) in Equation (5) by industry-year. We expect to be negative if

CPA-CFOs reduce firms’ operating efficiency (H2).15

We present the results of estimating Equation (5) in Table 6. Overall, we find limited

support for H2. Although the coefficient estimate on CPA in Column (1) for change in asset

turnover is negative and marginally significant (one-tailed p-value = 0.058), it is insignificant

in Column (2) for changes in sales per employee.16 Overall, although there is some evidence

that hiring a CPA-CFO negatively influences operating efficiency as evidenced by asset

turnover, the effect is rather weak. It does not appear that hiring a CPA-CFO has a significant

adverse impact on a firm’s operation efficiency, as measured by the sales-generating ability

of the firm’s resources.

[Table 6]

4.3.3 Investor relations-related CFO responsibilities

We test H3 regarding the investor relations-related CFO responsibilities by examining

how CPA-CFOs influence analyst coverage at the firm. We estimate the following model:

∆ , ,

∆ ∆ ∆∆ (6)

Similar to our analysis of operating efficiency ratios, we calculate the change in analyst

coverage from the end of the fiscal year prior to the hire year to the first full fiscal year in

which the CFO was employed at the firm. To control for industry-specific and year-specific

effects on analyst coverage, we industry-adjust analyst coverage and all financial variables by

                                                            15 In Equation (5), we do not use changes in control variables to avoid a mechanical association between the change in ROA and the change in asset turnover (i.e., asset turnover is a component of ROA). 16  We also investigated whether CPA-CFOs are differentially effective at cost management. We estimate Equation (5), replacing the dependent variable with changes in gross margin (∆ , ), changes in net profit margin (∆ , , and changes in SG&A scaled by sales (∆ / , ). The coefficient on CPA is significantly positive for changes in gross margin, providing some evidence that CPA-CFOs are more effective at cost management. We find no evidence, however, that a CPA-CFO has an effect on improving net profit margin or SG&A management.

25  

year in Equation (6). Table 7 presents the results of estimating Equation (6). The coefficient

on CPA is significantly negative (p-value < 0.001), consistent with H3. It appears that hiring

a CPA-CFO does reduce analyst coverage, consistent with the notion that CPA-CFOs are at a

disadvantage in cultivating relationships with investors and analysts. For the control

variables, we find that analyst coverage drops following restatements and during the SOX

period, while it increases with improving ROA and higher leverage ratio. Interestingly, we

also find that increases in analyst coverage occur when the firm already has an accounting-

focused position or the COO position.17

[Table 7]

4.3.4 Finance-related CFO responsibilities

Our measure of finance-related activities is based on firms’ stock repurchase

programs. Specifically, we measure market-adjusted stock returns cumulated in the three-day

window around a firm announcement related to its stock repurchase program (REP_CAR3).18

Similar to M&A announcements, we focus on the first three stock repurchase announcements

following the CFO hire. If CPA-CFOs are less adept at managing finance-related activities

than other CFOs, then the announcement returns are likely to be lower for firms with CPA-

CFOs than for firms with other CFOs. We estimate the following model:

_ 3 ,

∆ , ∆ ,

∗ (7)

                                                            17 This might be due to the fact that large firms are more likely to have the COO position and accounting-focused position. When we include the control variables in levels rather than changes (e.g., rather than ∆ ), CPA remains significantly negative in explaining change in analyst coverage. The coefficient estimates on Acct and COO also remain significant but the magnitude drops to 0.634 and 0.412, respectively, suggesting that firm size at least partially explain the results on Acct and COO reported in Table 7. 18 We use a Perl script to search all Form 8-K's filed between January 1, 1999 and December 31, 2013 to identify the sample of share repurchase announcements. We keep only those filings that contain the stem "announc" and the word "today," as well as one of the three phrases "repurchase program," "repurchase authorization," or "repurchase plan" within two consecutive lines of the filing. This approach is meant to bypass the known sample selection issues inherent in using Thomson SDC Platinum to identify repurchase announcement dates (Banyi, Dyl, and Kahle 2008).

26  

We follow prior research in determining the control variables (e.g., Grullon and Michaely

2004).19 If firms with CPA-CFOs are less effective in making stock repurchase decisions

(H4), we expect to be negative. The results are presented in Table 8. Across the three

columns in Table 8, the coefficient estimates on CPA are all statistically insignificant,

suggesting that hiring CPA-CFOs does not significantly influence firms’ stock repurchase

decisions. The results for the control variables are largely consistent with prior research (e.g.,

Grullon and Michaely 2004). Specifically, we find that the stock returns around stock

repurchase announcements tend to be lower for larger firms and higher for firms with higher

concurrent change in ROA and firms with lower growth prospects (i.e., higher book-to-

market ratios).

[Table 8]

Taking the results presented in Tables 5-8 together, we find little evidence that hiring

CPA-CFOs has significant negative effects on non-accounting related firm-level outcomes.

The only non-accounting aspect that appears adversely affected is investor relations activities

– hiring CPA-CFOs negatively affects the level of analyst following. We do not, however,

find similar negative effects with respect to strategy-related, operations-related or finance-

related job functions.20

                                                            19 In Equation (7), we don’t include the level of ROA as in prior equations because prior research on stock repurchases generally use changes in ROA rather than levels (e.g., Grullon and Michaely 2004). 20 We conduct a robustness check by using a stricter measure of accounting-focused background and expertise; that is, we consider a CFO as an accounting expert if the CFO holds a CPA designation but has no MBA experience. Although on average CPA-CFOs are less likely to have an MBA, it is still possible that some CPA-CFOs obtain an MBA education and then move toward a more general management-related career afterward. We conjecture that a CFO having a CPA but without an MBA is more likely to have pursued a more accounting-focused career path. Therefore, we repeat all of our previous analyses using this stricter measure of accounting expertise (CPA_FOCUS). Overall, while the results based on CPA_FOCUS are largely similar to the previously reported results, there is slightly more evidence in support of the negative effects of CPA-CFOs on non-accounting related job responsibilities. Analyst coverage continues to be adversely affected by hiring a CFO with a focused accounting career path. CPA_FOCUS does not appear to have an effect on the quality of merger and acquisitions decisions, but is negatively related to share repurchase announcements (coefficient = -0.005, one-tailed p-value = 0.04). Further, CPA_FOCUS has a significantly negative association with change in asset turnover ratio (coefficient = -0.024, one-tailed p-value = 0.03), and CPA-CFOs also appear to have a  

27  

5. Discussion of results and additional analyses

The results presented thus far indicate that there are relatively few negative

consequences to hiring an accounting expert CFO, aside from a decline in analyst following.

In contrast, prior research suggests positive financial reporting and internal control benefits to

the firm from hiring accounting expert CFOs. One possibility is that accounting expert CFOs

actually provide net benefits to the firm – in other words, their investment in accounting

expertise does not diminish their ability to manage non-accounting related functions, plus it

allows them to manage accounting related functions more effectively. If this is the case, we

would expect these CFOs to 1) be paid more and 2) have better labor market outcomes. We

explore these alternatives in the next sub-section.

5.1 Labor market analyses

We begin by examining the compensation of CFOs to shed light on the board’s

perception of the net cost-benefit tradeoff of hiring a CPA-CFO. Assuming that the labor

market is efficient, we expect compensation to reflect a CFO’s overall contribution to firm

value (e.g., Hamermesh 1986). We estimate an OLS regression of logged total compensation

on a variety of determinants, consistent with prior literature (e.g., Wang 2010):

∗, Δ ,

∑ (8)

To maintain consistency with prior research on executive pay we measure total

compensation using data from Execucomp (Wang, 2010). We include the main effects of

and , as well as the interaction to capture any increase in the cost of hiring a CPA

concurrent with the increase in demand for financial reporting expertise during the initial

years of the implementation of SOX (see Figure 1 and Table 4). To control for other

                                                                                                                                                                                         significantly higher likelihood of overinvesting (coefficient = 0.119, one-tailed p-value = 0.06) as well as underinvesting (coefficient = 0.124, one-tailed p-value = 0.05).

28  

potentially important dimensions of CFO experience, we include , an indicator

variable that equals one if the executive has prior CFO experience; , an indicator

variable that equals one if the executive is hired from outside the firm; and , which

broadly captures experience and risk aversion of the executive (Friedman 2014). Firm

controls include measures of size ( ), performance ( and Δ ), and growth

opportunities ( ), consistent with extant literature (Wang 2010).21

Table 9 presents the results of estimating Equation (8). The coefficient on CPA is

negative and statistically significant in each of the three estimations, which indicates that

CPA-CFOs receive significantly less total compensation than non-CPA CFOs in their first

full year after hire. This result is contrary to the notion that CPA-CFOs contribute more to

firm value than non-CPA CFOs. This result is also economically significant; depending on

the model specification, CPA-CFOs earn between 6.2% and 7.0% less than non-CPA CFOs.

Interestingly, however, we do not find a significant interaction of SOX and CPA,

notwithstanding the evidence above that firms were more likely to hire CPA-CFOs during the

implementation of SOX. That is, the increased demand for accounting expert CFOs does not

appear to result in higher salaries among CPA-CFOs on average. Among the remaining

control variables, we find that CFOs’ compensation is higher for larger firms and high growth

firms, as well as when the newly hired CFO has prior CFO experience.

[Table 9]

We next examine whether CPA-CFOs differ from non-CPA CFOs in terms of

subsequent labor market outcomes. In particular, we examine the probability that, within five

years of being hired as CFO, the individual (1) becomes a CEO at any US public firm or (2)

becomes the CEO at the same firm where they are currently employed as CFO. If, as our                                                             21 We follow Wang (2010) in determining the control variables included in Equation (8). In a robustness check, we include all the other determinants variables for hiring a CPA-CFO in Equation (8), the coefficient on CPA continues to be significantly negative.

29  

prior evidence suggests, CPA-CFOs are no worse than their non-CPA CFO counterparts in

terms of non-accounting related job performance, and are superior in terms of accounting-

related job performance, we would expect CPA-CFOs to be more likely to move into a CEO

position.

For both dependent variables, we estimate the following logistic regression model:

, (9)

Table 10 presents the results of estimating Equation (9), including the average

marginal effects. The results suggest that CPA-CFOs have significantly worse labor market

outcomes than non-CPA CFOs in terms of future career progression toward the CEO

position. The results in Column (1) suggest that CPA-CFOs are less likely to become CEO at

any US public company in the five years following hire. Specifically, the average marginal

effect implies that CPA-CFOs are approximately 2% less likely to become a CEO at any

public company within five years of being hired as a CFO, which is large in the magnitude

given that the overall likelihood of becoming a CEO is 6% within our sample (CEOkt,t+5 ,

Table 2 Panel A). Similarly, the results in Column (2) suggest that CPA-CFOs are less likely

to become CEO at their current firm in the five years following hire, suggesting the results in

Column (1) are not due to the effect of omitted firm-level variables correlated with CPA. The

average marginal effect of this model is 0.5%, which is still of a considerable magnitude

given that the overall likelihood of becoming the CEO at the current firm is 1% within our

sample (CEOit,t+5 , Table 2 Panel A). Overall, these results suggest that CPA-CFOs are less

likely than non-CPAs to move to higher responsibility roles such as CEOs after being hired

as a CFO.22

[Table 10]

                                                            22 In a robustness check, we find that focused CPA-CFOs (CFOs with a CPA but not an MBA) are also less likely to become a CEO in the next five years, and are paid less than other CFOs.

30  

In summary, we find that CPA-CFOs have lower compensation and are less likely to

be promoted to CEO, despite the fact that there is little evidence that CPA-CFOs are less

capable than non-CPA CFOs in performing a number of non-accounting related job functions

and prior research suggest they are better at performing accounting-related functions. On

par, these results would suggest accounting expert CFOs are more skilled than non-CPA

CFOs; however the labor market does not appear to recognize this fact.

5.2 Compensating strengths of the management team

Alternatively, it is possible that we do not observe negative firm-level outcomes

associated with hiring a CPA-CFO because firms compensate for any deficiencies in

managers’ skillset by employing other management team members with compensating

strengths. Our analysis of the determinants of hiring a CPA-CFO reported in Section 4.2

certainly suggests this as possibility – firms are more likely to hire a CPA-CFO if they

currently have a COO on the management team (holding other factors constant) and are less

likely to hire them if they have a high level accounting manager (e.g., Chief Accounting

Officer) on the management team.23

To provide further insight into the possibility of compensating effects, we re-run our

analysis of investment efficiency and operating efficiency, this time including an additional

interaction variable: CPA×COO. By including this interaction, the coefficient on CPA can

be interpreted as the effect on investment and operating efficiency of having a CPA-CFO for

firms that do not employ a COO. The coefficient on CPA×COO is the difference in the effect

of CPA-CFOs for firms employing COOs relative to firms not employing COOs. If the

                                                            23 However, the fact that prior studies find positive effects of employing an accounting expert CFO on accounting-related outcomes works against this explanation. Presumably, if firms compensated for hiring non-accounting expert CFOs by employing high level accounting managers, we would not expect to see a difference in accounting-related outcomes related to hiring an accounting versus non-accounting expert CFO, as prior studies have shown.

31  

compensating effect holds, we expect the coefficient on CPA to be positive (negative) and the

coefficient on CPA×COO to be negative (positive) for our investment efficiency (operating

efficiency) analysis. We focus on these two firm-level outcomes because the presence of a

COO is mostly likely to impact these two outcomes.

The results of these analyses (untabulated) provide some evidence consistent with the

compensating effect. When we re-examine the effect of CPA-CFOs on investment efficiency

after including the interaction term, we find a significantly positive main effect of CPA on

the probability of underinvesting (two-tailed p-value = 0.016 and marginal effect = 3.4%),

and a negative interaction term on CPA×COO (two-tailed p-value = 0.025), providing some

evidence consistent with a compensating effect of top management on investment efficiency.

Similarly, when we examine the existence of a compensating effect with respect to

operational efficiency (sales per employee), we find a negative main effect for CPA (two-

tailed p-value = 0.082) and a marginally positive interaction effect on CPA×COO (two-tailed

p-value = 0.115). Moreover, the sum of the coefficients on CPA and CPA×COO is

insignificantly different from zero. These results suggest that firms hiring CPA-CFOs but

who do not have a COO position have significantly worse changes in operating efficiency, as

measured using sales per employee, but firms with a COO at the time of the CFO’s hire do

not have similarly negative outcomes from hiring a CPA-CFO.

Thus, we find some evidence that firms compensate for possible deficiencies in the

skill set of CPA-CFOs by hiring COOs and that the presence of a COO moderates negative

firm outcomes on operational dimensions.24 This compensating effect may explain why we

                                                            24 We did not expect the presence of a COO to moderate the CPA-CFO effect on our strategy-related, investor-relations related or finance-related firm outcomes because these activities are not generally within the COO’s job responsibilities. For completeness (and as type of falsification test) we re-run these analyses including the CPA×COO interaction. In none of these analyses do we find a significantly negative coefficient on the CPA main effect or a statistically significant positive coefficient on the CPA×COO interaction.

32  

do not find significantly negative firm-level outcomes with the hiring of a CFO, despite the

fact that the labor market appears to value them less.

5.3 Status effects

Another explanation for our finding that CPA-CFOs have lower compensation and are

less likely to be promoted to CEOs is because of status effects. In particular, Erkens and

Bonner (2013) find that accounting expert board members have lower status in terms of

board seats, trusteeships, social club membership and elite education. In addition, higher

status firms are less likely to appoint accounting experts to their board, suggesting status

related concerns play a role in such appointments. Given their findings, it is not unreasonable

to consider the possibility that status is partially responsible for the lower compensation and

lower probability of being promoted to CEO for the CPA-CFO group. We explore this

possibility by examining the educational background of our CFOs and identifying those with

a degree from an elite institution.25 Consistent with the status related argument, CPA-CFOs

are less likely to have a degree from an elite institution (14.7%) relative to non-CPA CFOs

(26.8%). In addition, when we re-estimate Equations (8) and (9) after controlling for the elite

school status, we find that the elite school indicator is positive and significant in explaining

CFO compensation and the likelihood of becoming a CEO at any public company. In

addition, while the CPA variable remains significantly negative, there is a decline in the

coefficient magnitude and the significance level. Overall, these results are consistent with the

status argument.

                                                            25 We follow Butler and Gurun (2012) in defining elite schools. They define elite schools as the intersection of the top 20 ranking lists from US News (2008), Financial Times (2006), and Business Week (2000). Specific schools include the following: Berkeley, Chicago, Columbia, Dartmouth, Harvard, Michigan, MIT, Northwestern, NYU, Stanford, UCLA, Pennsylvania, and Yale. The finding that CPA-CFOs are less likely to have a degree from an elite institution (14.7%) relative to non-CPA CFOs is robust to the alternative list of elite schools following Engelberg, Gao, and Parsons (2013).

33  

In summary, our analyses indicate that there are relatively few negative firm level

outcomes associated with hiring an accounting expert CFO and this may be partially due to

the fact that firms compensate for any deficiencies in these managers’ ability to effectively

monitor the non-accounting related aspects of their job by hiring other management team

members to fulfill these responsibilities. As a result, CPA-CFOs may indeed provide lower

marginal benefits to the firm, which explains their lower compensation and lower likelihood

of being promoted to the CEO position. However, it also appears that the CPA-CFOs are hurt

by the fact that, on average, they are less likely to hold a degree from an elite university,

which influences pay and promotion to CEO. Finally, we cannot eliminate the possibility

that our analyses of firm-level outcomes fail to capture some intangible managerial skill that

CPA-CFOs lack and that warrants their lower pay and worse labor market outcomes.

6. Conclusion

In past decades, the role of the CFO within organizations has broadened beyond the

traditional financial reporting and treasury functions and CFOs are increasingly involved in

the strategy and overall operations of the firm. This paper examines the effects of hiring an

accounting expert CFO on firm outcomes for non-accounting related job responsibilities. We

use the CPA designation to proxy for a CFO’s accounting expertise. We first provide

evidence suggesting that acquiring accounting expertise requires a trade-off in terms of

acquiring other skills and knowledge (e.g., finance or general management). We then

examine the effects of hiring CPA-CFOs on firm-level outcomes related to strategy,

operations, investor-relations, and finance. We find significantly lower industry-adjusted

analyst following after the hiring of a CPA-CFO relative to a non-CPA CFO, suggesting that

CPA-CFOs are less adept at managing the investor relations aspect of the CFO position.

However, overall, we find little cost to hiring CPA-CFOs with respect to firm-level outcomes

on strategy, operations, and finance.

34  

In additional analyses, we find that, even though there is little cost to hiring CPA-

CFOs in terms of firm-level outcomes, CPA-CFOs are actually paid less than their non-CPA

CFO counterparts and are less likely to be promoted to the CEO position within five years.

We provide some preliminary evidence suggesting that two factors contribute to these

findings: (1) firms compensate for manager-specific weaknesses (e.g., a CPA-CFO’s lack of

operation expertise) by employing management team members with compensating strengths

(e.g. COOs); (2) CPA-CFOs have lower “status” which negatively influences their labor

market outcomes. However, we cannot eliminate the possibility that our analyses of firm-

level outcomes fail to capture some intangible managerial skill that CPA-CFOs lack and that

warrants their lower pay and worse labor market outcomes. Taken together, our findings

contribute to the literature on accounting expertise, as well as the management literature on

top management teams. Our results also have implications for boards of directors in their

hiring decisions and managers for their career development.

35  

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37  

Appendix A: Variable definitions Variable Name Definition Acct Indicator variable equal to one if the firm has an individual

other than the CFO with the term "Accounting" or “Controller” in the role description, and zero otherwise

Age Age of the CFO ATO Asset turnover (Compustat items SALE/AT) BM Book-to-market (Compustat items CEQ/(CSHO*PRCC_F)) Board seat at hire date Cash

Indicator variable equal to one if the CFO held a board seat on a public company at the time they were hired as CFO at the sample firm Cash and short-term investments scaled by total assets (Compustat items CHE/AT)

CEOCPA Indicator variable equal to one if the CEO has a CPA or Chartered Accountant qualification, and zero otherwise

CEOit,t+5 Indicator variable equal to one if the CFO became CEO of the same firm within 5 years of being initially hired as a CFO at the sample firm, and zero otherwise

CEOkt,t+5 Indicator variable equal to one if the CFO became CEO of a different public firm (firm k) within 5 years of being initially hired as a CFO at the sample firm, and zero otherwise

CFA Indicator variable equal to one if the CFO has a CFA qualification, and zero otherwise

Compt+1 Conglomerate

Total compensation in the first full year as CFO (Execucomp TDC1) Indicator variable equal to one if the acquirer and the target do not share the same 4-digit SIC code

Coverage Analyst coverage is measured as the maximum number of estimates used in calculating a consensus EPS forecast for the firm at any point during the fiscal year. Missing values are set to zero

CPA Indicator variable equal to one if the CFO has a CPA or Chartered Accountant qualification, and zero otherwise

ExtHire

Indicator variable equal to one if the CFO position was the first position the individual held at the company, as reported on Boardex

FirmAge The log of the number of years the firm has been listed on CRSP as of the start of the year

GM HiBM

Gross margin (Compustat items (SALE-COGS)/SALE) Indicator variable equal to one if book-to-market is greater than 1

IB Experience Indicator variable equal to one if the CFO has prior experience listed in Boardex from an investment bank, and zero otherwise

Investment Capital expenditures, plus acquisitions, research and development, less the sale of property, plant and equipment,

38  

plus depreciation (Compustat items CAPX + AQC + XRD – SPPE + DPC)

Lev MA_CAR3

Leverage, where values greater than 1 are winsorized to 1 (Compustat items (DLC+DLTT)/AT) Abnormal returns cumulated from 1 day prior to through 1 day following the announcement of a merger or acquisition

MBA Indicator variable equal to one if the CFO holds an MBA degree, and zero otherwise

MVE Market value of equity (Compustat items CSHO*PRCC_F) OVER Pct_Cash

Indicator variable equal to one if Residual investmentt+1 is in the top quartile of the distribution within our sample, and zero otherwise Proportion of the deal value paid in cash

PM Profit margin (Compustat items OIADP/SALE) PriorCFO Indicator variable equal to one if the CFO has prior

experience as a CFO of a public company Prop Public US Exp Relative_Size

Proportion of total years of experience listed on Boardex spent at a US public company Transaction value scaled by the lagged market capitalization of the acquiror

Residual investmentt+1 Unexpected investment in t+1, defined following Richardson (2006)

Restatet-3,t

REP_CAR3

Indicator variable equal to one if the firm had a restatement at any point within the 3 years prior to the CFOs start date at the sample firm, and zero otherwise Abnormal returns cumulated from 1 day prior to through 1 day following the filing date of an 8-K that contains a share repurchase plan announcement

Ret Market adjusted buy and hold returns for the first full year of the CFOs tenure

ROA Return on assets (Compustat items OIADP/AT) Sales/Employee Sales per employee (Compustat items SALE/EMP) Size Log of total assets (Compustat item AT) SGA/Sales Selling, general and administrative expenses relative to

sales (Compustat items XSGA/SALE) StockRet Stock returns for the year prior to the investment year, measured

as the change in market value of the firm over that prior year SOX Target_Private Target_Public

Indicator variable equal to one if the CFO was hired between 2004 and 2006 (inclusive) and zero otherwise Indicator variable equal to one if target of the merger or acquisition is a (non-subsidiary) private company Indicator variable equal to one if target of the merger or acquisition is a (non-subsidiary) public company

Tenure Value_Trans

Tenure in the CFO position at the sample firm (missing when Boardex indicates the individual was CFO at the firm in 2013) Value (in millions) of the transaction

39  

V/P Value to price ratio, measured as the ratio of the value of the firm ((1-αr)BV+ α(1+r)X – αrd) to the market value of equity (Compustat items CSHO*PRCC_F). Where α=(ω/(1+r-ω)), r=12%, ω=0.62, BV is book value of common equity (Compustat item CEQ), d is annual dividends (Compustat item DVC), and X is operating income after depreciation (Compustat item OIADP)

40  

Figure 1: Variable measurement timeline26

Hire year First full year as CFO

Start date - 3 t-1 Start date t t+1 Start date+5

Prior restatements Compensation, investment efficiency

Change in financial ratios, analyst coverage Likelihood of becoming future CEO

                                                            26 Regarding the M&A or repurchase tests, we examine the first three announcements following the CFO hiring date per CFO hire, regardless of when they occurred.

…  …

 

Figu

ure 2: CPAA hires overr time

41

42  

Table 1, Panel A: Sample selection Number of

observationsCFO hires from 1999-2008 at publicly traded US companies (excluding dual CEO-CFO positions)

11,157

Less: Divisional, regional, deputy, or co-CFOs (519) Less: Observations with missing CIK codes on Boardex (1,100) Less: CFOs that were employed for less than a complete fiscal year (1,725) Less: Multiple CFOs hired in the same calendar year (29) Less: Firm-years with missing assets (907) Sample of CFO hires 6,877

Note: Actual sample sizes differ depending on availability of control variables Table 1, Panel B: Sample distribution

Year CFO hires CPA hires Non-CPA

hires Proportion of CFO hires

with a CPA 1999 695 296 399 0.426 2000 739 318 421 0.430 2001 687 323 364 0.470 2002 703 348 355 0.495 2003 660 335 325 0.508 2004 734 377 357 0.514 2005 733 378 355 0.516 2006 704 388 316 0.551 2007 660 358 302 0.542 2008 562 277 285 0.493 Total 6,877 3,398 3,479 0.494

43  

Table 2: Descriptive statistics

Panel A: Full sample Variable N Mean 25th % Median 75th % Std Dev Panel A.1: CFO Characteristics CPA 6,877 0.49 0.00 0.00 1.00 0.50 MBA 6,877 0.38 0.00 0.00 1.00 0.48 IB Experience 6,877 0.07 0.00 0.00 0.00 0.26 CFA 6,877 0.01 0.00 0.00 0.00 0.11 Age 5,368 47.27 42.00 47.00 52.00 6.91 Prior CFO experience 6,877 0.27 0.00 0.00 1.00 0.45 Tenure 5,918 4.46 5.76 3.84 2.53 2.46 External Hire 6,877 0.54 0.00 1.00 1.00 0.50 Board seat at hire date 6,877 0.14 0.00 0.00 0.00 0.35 Prop Public US Exp 5,559 0.31 0.00 0.10 0.61 0.38 CEOkt,t+5 6,877 0.06 0.00 0.00 0.00 0.24 CEOit,t+5 6,877 0.01 0.00 0.00 0.00 0.11 Panel A.2: Determinants of hiring a CPA Restatet-3,t 6,877 0.14 0.00 0.00 0.00 0.35 Acctt-1 6,877 0.37 0.00 0.00 1.00 0.48 COO-1 6,877 0.33 0.00 0.00 1.00 0.47 CEOCPA-1 6,877 0.06 0.00 0.00 0.00 0.24 MVEt-1 5,804 3,854.00 91.21 354.56 1,449.27 18,363.37 BMt-1 6,669 0.53 0.15 0.41 0.72 0.55 ROAt-1 6,552 -0.02 -0.01 0.05 0.10 0.31 Levt-1 6,581 0.23 0.02 0.17 0.35 0.23 Panel A.3: Firm outcomes Residual investmentt+1 5,396 0.00 -0.05 -0.01 0.02 0.13 ∆ATOIA 6,551 -0.05 -0.16 0.00 0.13 0.47 ∆Sale/EmployeeIA 5,868 6.06 -46.45 -0.36 44.68 414.81 ∆CoverageIA 6,672 -0.12 -1.09 -0.32 0.65 2.87 Compt+1 2,227 1,514.14 573.71 977.75 1,760.34 1,970.18

44  

Table 2, Continued. Panel B: Descriptive statistics by CFO type CPA Non-CPA Mean

Difference

Variable N Mean Median N Mean Median p-value Panel B.1: CFO Characteristics MBA 3,398 0.29 0.00 3,479 0.47 0.00 -0.18*** 0.000IB Experience 3,398 0.03 0.00 3,479 0.11 0.00 -0.08*** 0.000 CFA 3,398 0.01 0.00 3,479 0.02 0.00 -0.01*** 0.004 Age 2,673 46.61 46.00 2,695 47.91 48.00 -1.30*** 0.000Prior CFO experience 3,398 0.28 0.00 3,479 0.27 0.00 0.01 0.314 Tenure 2,884 4.35 3.80 3,034 4.55 3.90 -0.20*** 0.002 External Hire 3,398 0.56 1.00 3,479 0.53 1.00 0.02* 0.090 Board seat at hire date 3,398 0.12 0.00 3,479 0.16 0.00 -0.04*** 0.000 Prop Public US Exp 2,820 0.28 0.07 2,739 0.34 0.14 -0.07*** 0.000 CEOkt,t+5 3,398 0.05 0.00 3,479 0.07 0.00 -0.01** 0.010 CEOit,t+5 3,398 0.01 0.00 3,479 0.01 0.00 0.00 0.111 Panel B.2: Determinants of hiring a CPA Restatet-3,t 3,398 0.15 0.00 3,479 0.13 0.00 0.03*** 0.001Acctt-1 3,398 0.33 0.00 3,479 0.40 0.00 -0.07*** 0.000 COO-1 3,398 0.33 0.00 3,479 0.32 0.00 0.01 0.478 CEOCPA-1 3,398 0.07 0.00 3,479 0.05 0.00 0.02*** 0.005MVEt-1 2,883 2,617.11 288.17 2,921 5,074.81 463.17 -2,457.71*** 0.000 BMt-1 3,296 0.52 0.41 3,373 0.53 0.42 0.00 0.792 ROAt-1 3,238 -0.03 0.04 3,314 -0.02 0.05 -0.01 0.398 Levt-1 3,250 0.22 0.16 3,331 0.24 0.18 -0.01** 0.016 Panel B.3: Firm outcomes Residual investmentt+1 2,687 0.00 -0.01 2,709 0.00 -0.01 0.00 0.409 ∆ATOIA 3,237 -0.05 0.00 3,314 -0.04 0.00 -0.01 0.353 ∆Sale/EmployeeIA 2,913 -0.24 -1.25 2,955 12.28 0.00 -12.52 0.248 ∆CoverageIA 3,301 -0.10 -0.33 3,371 -0.14 -0.32 0.04 0.565 Compt+1 1,000 1,300.38 867.15 1,227 1,688.34 1,093.59 -387.96*** 0.000

This table presents descriptive statistics for the full sample and separately for CPA and non-CPA hires. See Appendix A for variable definitions. Note that the superscript IA indicates industry-adjusted variables, where industry adjustments are based on 4-digit SIC codes using the Compustat population. ***, **, * indicate significance of the mean values between the CPA- and non-CPA CFO hires at the 1%, 5%, and 10% levels respectively.

45  

Table 3: Correlation matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9)

CPA MBA IB

Experience CFA PriorCFO Prop Public

US Exp Board Seat at Hire Date ExtHire Age

(2) MBA -0.185 (0.000) (3) IB Experience

-0.158 0.136

(0.000) (0.000) (4) CFA -0.035 0.032 0.068 (0.004) (0.008) (0.000) (5) Prior CFO 0.012 0.113 -0.018 -0.020 (0.314) (0.000) (0.130) (0.094) (6) Prop Public US Exp

-0.089 0.162 0.001 0.018 0.344

(0.000) (0.000) (0.943) (0.177) (0.000) (7) Board Seat at Hire Date

-0.055 0.058 0.058 0.005 0.076 0.017

(0.000) (0.000) (0.000) (0.682) (0.000) (0.207) (8) ExtHire 0.021 0.128 0.050 0.005 0.357 0.156 0.048 (0.090) (0.000) (0.000) (0.692) (0.000) (0.000) (0.000) (9) Age -0.094 0.073 -0.098 -0.039 0.210 0.083 0.108 0.134 1.000 (0.000) (0.000) (0.000) (0.004) (0.000) (0.000) (0.000) (0.000)

This table presents Pearson correlation coefficients between variables representing characteristics of the CFOs hired in our sample over the period 1999-2008. See Appendix A for variable definitions. p-values are presented in parentheses.

46  

Table 4: Determinants of hiring a CPA

(1) (2) (3) (4)

VARIABLES Coefficient Marginal Effects Coefficient

Marginal Effects

Restatet-3,t 0.216*** 0.053*** 0.184** 0.045** (3.06) (3.07) (2.49) (2.50) SOXt 0.182*** 0.045*** 0.182*** 0.044*** (3.47) (3.48) (3.09) (3.10) Acctt-1 -0.329*** -0.081*** -0.172*** -0.042*** (-6.50) (-6.59) (-2.94) (-2.94) COOt-1 0.286*** 0.071*** 0.292** 0.071** (2.69) (2.70) (2.56) (2.56) CEOCPAt-1 0.053 0.013 0.134** 0.033** (1.02) (1.02) (2.36) (2.36) LnMVEt-1 -0.129*** -0.031*** (-8.26) (-8.46) ROAt-1 0.152 0.037 (1.48) (1.48) BMt-1 -0.169*** -0.041*** (-3.20) (-3.21) Levt-1 -0.257** -0.063** (-2.10) (-2.10) Constant -0.024 0.836*** (-0.61) (7.50) Observations 6,877 5,793 Pseudo R2 0.007 0.018 This table presents estimates from a logistic regression of the determinants of hiring a CFO with a CPA qualification. The dependent variable equals one if the CFO hired has a CPA and zero otherwise. See Appendix A for other variable definitions. z-statistics in parentheses, *** p<0.01, ** p<0.05, * p<0.1.

47  

Table 5, Panel A: Market returns to M&A announcements (1) (2) VARIABLES MA_CAR3 MA_CAR3 CPA 0.004 0.004

(1.22) (1.22) Restatet-3,t 0.003

(0.68) SOXt -0.001

(-0.29) Acct t-1 0.004

(1.07) COO t-1 0.004

(1.09) CEOCPA -0.006

(-0.69) LnMVEt-1 -0.003**

(-2.10) ROAt-1 0.011

(0.52) BMt-1 -0.000

(-0.06) Levt-1 0.023**

(2.04) Casht-1 -0.000 0.004

(-0.04) (0.33) Target_Public -0.023*** -0.020***

(-4.21) (-3.50) Target_Private -0.006 -0.007

(-1.57) (-1.61) Pct_Cash -0.000 -0.000

(-0.10) (-0.23) Conglomerate 0.001 0.001

(0.31) (0.31) Value_Trans -0.000** -0.000*

(-1.99) (-1.85) Relative_Size 0.022*** 0.019***

(3.78) (3.41) Constant 0.012 0.022*

(1.60) (1.69)

Observations 1,737 1,730 R-squared 0.023 0.029 This table presents results from estimating an OLS regression of three-day cumulated abnormal returns surrounding the announcement date of a merger or acquisition on various determinants. Variable definitions are provided in Appendix A. Heteroskedastic-robust t-statistics in parentheses. *** p<0.01, ** p<0.05, * p<0.1

48  

Table 5, Panel B: Investment efficiency

(1)

UNDER (2)

OVER

VARIABLES Coefficient Marginal

effect Coefficient Marginal

effect CPA 0.097 0.018 -0.012 -0.008 (1.35) (1.50) (-0.17) (-0.69) Restatet-3,t 0.091 0.014 0.029 -0.000 (0.94) (0.90) (0.30) (-0.03) SOXt 0.247*** 0.061*** -0.276*** -0.066*** (3.23) (4.89) (-3.45) (-4.88) Acct t-1 -0.175** -0.025* -0.097 -0.007 (-2.23) (-1.90) (-1.26) (-0.50) COOt-1 -0.026 0.000 -0.080 -0.013

(-0.35) (0.03) (-1.06) (-1.00) CEOCPA -0.250* -0.030 -0.228 -0.026 (-1.65) (-1.17) (-1.54) (-0.99) LnMVEt-1 -0.186*** -0.030*** -0.042** 0.004 (-8.52) (-8.47) (-2.04) (1.15) ROAt-1 -0.875*** -0.087*** -1.086*** -0.143*** (-5.10) (-3.51) (-6.34) (-5.64) BMt-1 -0.532*** -0.058*** -0.573*** -0.071*** (-6.89) (-4.45) (-7.09) (-5.06) Levt-1 -1.270*** -0.173*** -0.830*** -0.071**

(-7.34) (-6.04) (-5.01) (-2.52) Residual investmentt 0.863*** 0.058 1.504*** 0.220***

(2.99) (1.30) (5.16) (4.78) Constant 0.971*** 0.273*

(5.91) (1.67)

Observations 5,029 Pseudo R2 0.044

This table presents results from estimating a multinomial logistic regression, where groups are defined based on the value of investment efficiency as defined in Richardson (2006). z-statistics in parentheses. *** p<0.01, ** p<0.05, * p<0.1

49  

Table 6: Changes in financial performance (ratio analysis) (1) (2) (3) (4) VARIABLES ∆ATO IA

t-1,t+1 ∆ATO IAt-1,t+1 ∆Sales/Employee IA

t-1,t+1 ∆Sales/Employee IAt-1,t+1

CPA -0.017 -0.018 -14.558 -10.974 (-1.49) (-1.57) (-1.34) (-1.01) Restatet-3,t 0.032** 0.427 (2.04) (0.03) SOXt 0.024* -56.935*** (1.90) (-4.83) Acct 0.029** 9.876 (2.36) (0.87) COO 0.007 -9.311 (0.61) (-0.82) CEOCPA 0.036 -24.849 (1.52) (-1.10) LnMVEIA

t-1 -0.007** -0.008*** 6.250** 5.277* (-2.28) (-2.67) (2.22) (1.80) ROAIA

t-1 -0.001 -0.001 -0.315 -0.316 (-1.56) (-1.60) (-0.57) (-0.57) BMIA

t-1 0.000 0.000 0.062*** 0.065*** (1.05) (0.93) (3.43) (3.63) LevIA

t-1 0.043 0.036 82.111*** 77.663*** (1.40) (1.17) (2.83) (2.67) Constant -0.014 -0.041*** 14.958* 31.865*** (-1.61) (-3.68) (1.87) (3.04) Observations 5,792 5,792 5,545 5,545 R-squared 0.002 0.005 0.005 0.010

This table presents results of estimating the effect of CPA CFOs on industry adjusted changes in accounting ratios. Control variables for size, book-to-market, leverage and performance are also industry adjusted. Industry adjustment is based on the the firms 4-digit SIC code using all available and matched firm-years from Compustat. t-statistics are presented in parentheses, *** p<0.01, ** p<0.05, * p<0.1.

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Table 7: Changes in analyst coverage (1) (2) VARIABLES ∆CoverageIA

t-1,t+1 ∆CoverageIAt-1,t+1

CPA -1.479*** -1.148***

(-7.70) (-6.13) Restatet-3,t -1.557*** (-6.09) SOXt -1.020*** (-5.01) Acctt-1 2.939***

(15.42) COOt-1 1.468***

(7.49) CEOCPAt-1 -0.205

(-0.53) ∆LnMVEIA

t-1,t+1 -0.013 -0.088 (-0.11) (-0.76)

∆ROAIAt-1,t+1 0.044 0.054*

(1.31) (1.65) ∆BMIA

t-1,t+1 -0.000 -0.000 (-0.38) (-0.81)

∆LevIAt-1,t+1 1.215* 0.789

(1.67) (1.11) Constant -0.909*** -1.333***

(-6.66) (-4.76)

Observations 5,629 5,629 R-squared 0.011 0.071

Change in analyst coverage and the financial variables are industry adjusted using 4-digit SIC codes based on the Compustat population. t-statistics in parentheses. *** p<0.01, ** p<0.05, * p<0.1

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Table 8: Market returns to share repurchase program announcements (1) (2) VARIABLES REP_CAR3 REP_CAR3 CPA -0.001 -0.003

(-0.46) (-0.91) Restatet-3,t -0.001

(-0.31) SOXt 0.002

(0.57) Acct 0.003

(0.90) COO 0.003

(1.19) CEOCPA 0.002

(0.50) LnMVEt-1 -0.003***

(-3.12) ∆ROAt-1,t 0.125***

(2.91) ∆ROAt,t+1 0.003

(0.09) BMt-1 0.013**

(2.25) Levt-1 0.017 (1.64) Casht-1 -0.003 0.002

(-0.34) (0.15) HiBMt-1* Casht-1 0.042* 0.006

(1.95) (0.21) Constant 0.011*** 0.022**

(5.39) (2.40)

Observations 3,685 3,665 R-squared 0.001 0.016 This table presents results from estimating an OLS regression of three-day cumulated abnormal returns surrounding the date of an announcement regarding the firm’s repurchase program on various determinants. Variable definitions are provided in Appendix A. Heteroskedastic-robust t-statistics in parentheses. *** p<0.01, ** p<0.05, * p<0.1

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Table 9: Likelihood of becoming a future CEO (1) (2)

Pr(CEOkt,t+5=1) Pr(CEOit,t+5=1)

VARIABLES Coefficient Marginal effects Coefficient

Marginal effects

CPA -0.372*** -0.019*** -0.426* -0.005* (-2.98) (-2.80) (-1.66) (-1.73) PriorCFO 0.155 0.010 -0.161 -0.002 (1.13) (1.41) (-0.54) (-0.49) LnMVEt-1 0.089*** 0.004** (2.82) (2.11) Aget -0.026*** -0.001*** -0.019 -0.000 (-2.83) (-2.68) (-1.02) (-0.89) Constant -1.975*** -3.268*** (-4.21) (-3.69) Observations 4,672 5,368 Pseudo R2 0.012 0.006

This table presents estimates from a logistic regression model estimating the likelihood of career progression via future CEO positions. See Appendix A for a list of variables used in the analysis. Robust z-statistics in parentheses, *** p<0.01, ** p<0.05, * p<0.1.

 

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Table 10: CFO compensation (1) (2) (3) VARIABLES Ln(Compt+1) Ln(Compt+1) Ln(Compt+1) CPA -0.077*** -0.083** -0.077** (-2.71) (-2.37) (-2.17) CPA*SOXt 0.019 0.002 (0.34) (0.04) SOXt 0.099 (0.97) PriorCFO 0.155*** 0.155*** 0.156*** (4.46) (4.46) (4.48) ExtHire 0.026 0.026 0.026 (0.81) (0.80) (0.81) LnSalest+1 0.313*** 0.314*** 0.313*** (29.05) (29.00) (28.99) Aget+1 0.000 0.000 0.000 (0.04) (0.03) (0.01) Rett,t+1 -0.015 -0.015 -0.015 (-0.55) (-0.55) (-0.56) ∆ROAt,t+1 -0.171 -0.170 -0.170 (-1.17) (-1.16) (-1.16) BMt -0.277*** -0.276*** -0.275*** (-8.82) (-8.81) (-8.75) Year Fixed Effects Y Y Y Observations 2,045 2,045 2,045 R-squared 0.422 0.422 0.422 See Appendix A for variable definitions. Heteroskedastic-robust t-statistics in parentheses. *** p<0.01, ** p<0.05, * p<0.1.