Women can hold up half of the sky.
-Mao Tse-tung.
Abstract
We study the effect of chief financial officer (CFO) gender on earnings management (EM) in China’s listed firms from 1999 to 2011. In the cross-sectional analysis, we find that female CFO firm-years exhibit significantly lower discretionary accruals, lower total accruals, lower abnormal production costs, and higher abnormal discretionary expenditures, than the male CFO firm-years. We further examine the relation between CFO gender and EM surrounding CFO transitions. We find that the departing male CFOs are more aggressive than the departing female CFOs in managing up earnings during their last year with the firm and the newly appointed male CFOs are more aggressive than the new female CFOs in managing down earnings during their first year on the job. The evidence surrounding CFO transitions suggests that male CFOs are more aggressive than female CFOs in manipulating earnings, either in the last attempt to save their jobs or to take bigger credit for any future performance gains. Overall, our empirical evidence suggests that female CFOs engage in less EM and are more conservative in financial reporting than their male counterparts.
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Notes
Source: “U.S., China in Cold War over Accounting Rules,” Bloomberg Business Week, December 4, 2012 issue.
Source: www.reuters.com, 1/23/2014. On January 23, 2014, a judge in the United States ruled that the Chinese units of the “Big Four” accounting firms should be suspended from auditing U.S. listed Chinese firms for 6 months. Failure to resolve the issue in six months could result in the SEC banning Chinese accounting firms from auditing U.S. listed Chinese companies, which could lead to more delisting of the accused companies.
Source: Wall Street Journal, 5/29/2013 and China Daily, 7/10/2013, respectively.
Barua et al. (2010) examine a sample of 2,781 firm-year observations over a two-year period (2004–2005).
According to Grant Thornton International Business Report 2007, approximately eight out of ten public companies in China have women in the senior management roles, compared to a half in the European Union and two-thirds in the U.S. About 31 % of top corporate executives are female in China, compared to 20 % in the U.S.
Please see the “Accruals-based measures” section in Appendix 1 for the description and estimation of our accruals-based earnings management measures.
Our results do not show a significant difference between male and female CFOs in sales manipulation, we hence do not focus on this measure of EM in our study.
Please see the “Real activities-based measures” section in Appendix 1 for the description and estimation of our real activities-based earnings management measures.
There are 1,995 unique firms in the sample and 108 of them stay for the entire sample period.
Using data from 1998–2009 Wang and Campbell (2012) also find that implementation of IFRS does not reduce or increase earnings management in Chinese listed companies.
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Acknowledgments
We thank Elizabeth Devos, Markus Schmid, Dechun Wang, Sabine Wende, and participants at the 2010 European FMA conference, the 2011 FMA annual meeting, the 2013 EFA annual meeting, and brown bag seminar at University of Texas at El Paso for helpful comments. We thank the College of Business Administration at the University of Texas at El Paso for financial supports.
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Appendices
Appendix 1: Earnings management measures
1.1 Accruals-based measures
We employ DCAC as our primary accruals-based measure for earnings management. We estimate the following modified Jones model as in Dechow et al. (1995) to obtain the discretionary current accruals:
where CAC is current accruals, measured as the change in non-cash current assets less the change in current liabilities excluding the change in short-term debt. TA is total book assets. ΔREC is the change in accounts receivable. ΔS is the change in sales between current year and the year before.
The parameters in model (2) are estimated each year cross-sectionally by industry. The estimated coefficients are then used to calculate the normal or predicted current accruals. The DCAC is the difference between the actual current accruals (CAC) scaled by lagged TA and the predicted current accruals.
We also use total accruals (TAC) as an alternative measure, which is the difference between operating income before taxes and cash flows from operating activities, scaled by lagged TA.
1.2 Real activities-based measures
We follow Roychowdhurry (2006) and use abnormal production costs and abnormal discretionary expenditures as our real activities-based earning management measures, modeled in Eqs. (3) and (4) below, respectively:
where PCOST is production cost, defined as costs of goods sold (COGS) plus change in inventory. DXPN is discretionary expenditures, defined as the sum of research and development (R&D) and selling, general and administrative (SG&A) expenses.
Models (3) and (4) are also estimated each year cross-sectionally by industry. The estimated coefficients are then used to calculate the normal production cost and normal discretionary expenditures. The abnormal production costs (ABCOST) are the difference between the actual production costs scaled by lagged TA and the normal production costs estimated in model (3). The abnormal discretionary expenditures (ABDXPN) are the difference between the actual discretional expenditures scaled by lagged TA and the normal discretionary expenditures estimated in model (4).
Appendix 2
See Table 10
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Liu, Y., Wei, Z. & Xie, F. CFO gender and earnings management: evidence from China. Rev Quant Finan Acc 46, 881–905 (2016). https://doi.org/10.1007/s11156-014-0490-0
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DOI: https://doi.org/10.1007/s11156-014-0490-0