A fall into the pit, a gain in your wit: Top managerial career setback experience and accounting conservatism

Abstract

This study investigates the relationship between chief executive officers (CEOs) and chief financial officers (CFOs) with career setbacks and firms’ accounting conservatism. Using manually collected data from Chinese listed firms, this study finds that firms run by CEOs/CFOs who experienced career setbacks adopt more conservative accounting policies. In addition, the degree and timing of career setbacks and the experience of demotion and penalization by regulations affect CEOs’/CFOs’ decision-making. The results are robust to a battery of checks and analyses, including the propensity score matching procedure, the difference-in-differences method, and alternative measures. Further evidence suggests that the positive association between CEOs/CFOs with career setbacks and firms’ accounting conservatism is more pronounced at firms with better corporate governance, effective internal control, and higher financial constraints. This study also shows that financially conservative firms have more cash holding, which is positively correlated with career setbacks. JEL Classification: G34, M41, G41