ON THE BENEFITS OF CFO ACCOUNTING EXPERTISE

Abstract

I examine the relation between CFOs accounting expertise and reporting quality. Using past experience data of CFOs from S&P 500 firms, I construct an index to measure the CFOs accounting ability. It is shown that there is a positive association between CFOs accounting ability and firms’ reporting quality. This effect becomes more pronounced when CFOs have lower pay-performance-sensitivity, have more power relative to the top five executives, are more experienced and far from retirement age. The results are robust under a two-stage least square test using CFO labor market supply as the instrumental variable to address the self-selection issue that CFOs with greater accounting ability choose firms with better financial reporting quality. Additionally, I find a positive association between CFOs accounting ability and firm value whereas the risk level (measured by ROA volatility) is not affected by the accounting ability. The results provide new insights on the benefits for firms hiring CFOs with accounting expertise.