Chief Financial Officer Power, Pay Duration, and Earnings Quality

While numerous studies have examined the impact that powerful CEOs have on their compensation and overall firm decisions, relatively little is known about how powerful CFOs influence their compensation and important firm outcomes, such as earnings quality. This is somewhat surprising given the critical role CFOs play in the financial reporting process of a firm. We examine whether relatively more powerful CFOs influence the “duration” of their compensation. Our results suggest that powerful CFOs have shorter pay durations than less powerful CFOs, giving powerful CFOs faster unrestricted access to their compensation. Additionally, we examine whether powerful CFOs affect the earnings quality of the firms they manage, particularly when the incentives arising from “pay duration” are strong. We find higher levels of income-increasing accrual-based earnings management in firms with powerful CFOs who have short pay durations.