Abstract
This study examined whether chief executive officers’ (CEOs) with narcissistic tendencies are more likely to execute earnings management behavior because of pressure to fulfill earnings thresholds. The results revealed that a CEO who exhibits high narcissism is more likely to be involved in earnings management to compensate for her/his performance. Our findings suggest that CEO narcissism directly influences financial decisions. Considering the earnings thresholds, firms with a more narcissistic CEO experience a regulatory effect on real earnings management behavior. Studies have indicated that CEOs manipulate earnings to satisfy three primary earnings thresholds: prior year’s reported earnings, zero earnings, and analysts’ forecasts. Our empirical results provide further evidence that CEOs engage in earnings management to fulfill positive earnings thresholds and analysts’ forecasts. We infer that CEOs use the abnormal production cost method as an underlying mechanism to increase reported earnings. Our findings help clarify the relationship between CEO personality traits and earnings manipulation to assist investors with decision-making.
1. Introduction
Corporate earnings management (EM) is usually conducted through net operating profit or deferred income tax (Cazier, Rego, Tian, & Wilson, 2015). The literature has indicated that managers can make managerial decisions to enhance present profits (Haga, Ittonen, Tronnes, & Wong, 2018). Moreover, managers can use accounting or real economic actions to manage short-term performance and, consequently, serve self-interests, such as by triggering earnings-based performance compensation (Cheng, Lee, & Shevlin, 2015).
Practical implications
Studies have identified a hierarchical relationship between earnings thresholds in which the positive earnings threshold is the most important, followed by the pre-earnings threshold, and finally the analysts’ forecast. In this study, we examined whether the earnings thresholds could be changed based on the CEO’s degree of narcissism. Our findings suggest that CEO narcissism impels leadership to influence financial decisions more directly. CEOs manipulate earnings to satisfy all three earnings thresholds. This study sought to clarify the relationship between CEO personality and earnings manipulation to assist investors with decision-making.
