CFO Effort and Public Firms' Financial Information Environment

Abstract

We test the association between CFO effort and the quality of public firms’ financial information environments. We evaluate this relation using a measure of CFO leisure consumption – specifically, the amount of golf played – as an inverse proxy for effort. We find that CFOs consume more leisure (play more golf) when they have weaker equity-based incentives, and that high CFO leisure consumption is associated with lower earnings quality. This result holds with firm or CFO fixed effects and when using local weather quality to instrument for golf play, in support of a causal interpretation of the results. Higher CFO leisure consumption is also negatively associated with the informativeness of earnings calls and the accuracy of management guidance. Additionally, external monitors appear to be affected by the level of CFO effort as higher CFO leisure consumption is associated with greater analyst forecast dispersion and increased audit fees. Overall, the results suggest that CFOs respond to equity-based economic incentives, and that lower CFO effort weakens public firms’ financial information environment.

Keywords: Financial Reporting Quality, Agency Theory, Chief Financial Officers, CFOs, Incentive Compensation

JEL Classification: M4, M41, G3, G34