Tone at The Top: The Influence of Ceo Personal Characteristics On Corporate Financial Reporting and Environmental Responsibility

Abstract

This thesis examines the impact of personal managerial characteristics on the decision making of chief executives (CEOs) at a corporate level. The research suggests executives’ personal philanthropy and educational backgrounds have a potent effect on corporate malfeasance in financial reporting and corporate environmental engagement and performance. My thesis is comprised of two studies. The first study explores the impact of CEO personal altruism on corporate malfeasance in financial reporting. The results show that firms run by CEOs with altruistic preferences, as captured by their stock donations, are less likely to commit financial fraud and exhibit lower levels of real and accrual-based earnings manipulation. These effects are more pronounced for CEOs who do not backdate when making stock donations and who donate stocks outside the tax season. The results are robust to a battery of endogeneity checks, including examining the effect of CEO turnovers, using difference-in-difference models, and applying an instrumental variable approach. Overall, the results suggest that personal altruism of managers has a disciplining effect on corporate malfeasance in financial reporting. Subsequently, the next chapter addresses potential measurement error of personal managerial altruism and extends the research of the effect of CEO altruism on the readability of a firm’s annual financial report. Similar conclusions are obtained when proxying CEO altruism by five alternative measures other than CEO stock donations. Further, the results also show that financial reports are more comprehendible for firms with altruistic CEOs. Building on the theories of familiarity and self-efficacy, the second study investigates the relationship between CEO educational background in science and MBA degrees, and corporate environmental responsibility. Using a sample of S&P 1500 firms, this research conducts difference-in-difference analyses utilizing CEO turnovers to highlight the impacts of CEOs backgrounds on corporate environmental ratings and performance. The results show that science-educated CEOs take greater environmental risks rather than refraining from investing in environmental strengths which result in lower overall environmental CSR ratings. Conversely, CEO holdings MBA degrees outperform non-MBA CEOs in overall environmental CSR performance because MBA CEOs are more risk-averse in taking additional environmental risks. The overall findings document that CEO educational background may be a potent predictor of differences in corporate environmental engagement and performance.