Financial executives who experience a significant accounting-related event seem to learn their lesson, according to a research study forthcoming in the The Accounting Review.
In a study titled “The Effect of Managerial Adverse Experience on Financial Reporting” researchers identified 661 senior financial executives who experienced a significant adverse accounting-related event. The adverse experiences included financial reporting litigation, restatements of financial statements, SEC investigations, and class action lawsuits. The researchers then examined the financial reporting attributes of those executives’ subsequent companies before and after the executive was hired into the senior management team. The article is authored by Thomas Kubick from the University of Nebraska-Lincoln and Yijun Li of Erasmus University.
For the 661 senior financial executives examined in the study, the most common positions were CFO and Controller. Other positions included Treasurer and Chief Accounting Officer. The average age of the executives was just over 50 years old and 89% were male. The period examined by the study was from 1993 to 2015.
“We were interested in determining if executives who experienced accounting-related problems at a former company were more or less likely to experience similar problems at their next employer,” say Kubick. On the one hand, a CFO or controller from a troubled company may bring an aggressive accounting stance to their new company. On the other hand, the executive may have learned his or her lesson and not want to experience another adverse accounting-related event.
The study’s results were consistent with adaptive learning theory or, more informally, the “hot stove” effect. Financial executives burned by an accounting issue in the past were more likely to be conservative with their accounting at their next employer. The study also observes that their new companies are less likely to experience a future accounting restatement or SEC investigation.
Li notes that “Our results suggest that the effect of adverse accounting-related experience can have a persistent effect on subsequent behavior. Our findings are even stronger when the executive’s prior adverse accounting experience was more recent or if the experience led to a more severe career consequence for the executive. More salient experiences seemed to have a greater effect on financial reporting.”
“The potential effects of prior professional experiences, in our case adverse accounting events, should not be overlooked. We provide evidence that financial executives associated with prior accounting problems are not apt to repeat the performance at their next employer. Whether experience interacts with other managerial characteristics or incentives would be a potentially fruitful area for future research,” concludes Kubick.