[Finance] Suil Pae - Career Concerns and Financial Reporting Quality
- SKKGSB
- Hit1838
- 2022-01-17
Area | Finance | |
---|---|---|
Faculty | PAE, Suil | |
Journal | Contemporary Accounting Research | |
Title | Career Concerns and Financial Reporting Quality |
Professor Suil Pae's paper, "Career Concerns and Financial Reporting Quality," has been accepted for publication in the Contemporary Accounting Research.
Abstract
Managerial career concerns could affect firm efficiency through financial reporting quality, but this important link has received relatively little attention in the literature. The present study examines this link by developing a model that has the following elements.
A risk-neutral manager provides effort to increase the market value of the firm and to favorably influence the market assessment of her ability. Depending on the magnitude of career concerns, she either under- or overinvests effort relative to an efficiency-maximizing level.
The analysis identifies conditions under which higher-quality reporting induces the manager to invest more effort.
Under these conditions, the model is extended to a setting in which the manager also chooses the quality of financial reporting at some cost.
In doing so, she seeks to reduce distortion in her effort investment. The equilibrium reporting quality and effort investment are determined by a trade-off between them. In the presence of high uncertainty about the firm’s future cash flows, if the manager’s career concerns exceed a threshold, she underinvests in reporting quality and overinvests effort.
The empirical implication is a negative relation between managerial career concerns and financial reporting quality.
To a large extent, this is consistent with findings in prior empirical studies.
Thus, the present study offers a theoretical explanation for the empirical findings as an equilibrium outcome.