CEOs’ Experience of the Great Chinese Famine and Accounting Conservatism

Abstract

This paper examines the link between adverse early-life experiences of CEOs and accounting policy choice, in particular whether a CEO’s experience of the Great Chinese Famine impacts the accounting conservatism of his or her company. Our results show that companies whose CEOs had famine experience in early life adopt more conservative accounting policies. We also find that the positive association between a CEO’s famine experience and the company’s accounting conservatism is moderated by the structure of firm ownership and environmental uncertainty arising from turnover among core government officials and the adoption of International Financial Reporting Standards (IFRS). Additional tests identify two direct links between the famine experiences of CEOs and the accounting conservatism of the company. CEOs who experienced famine are more likely to conservatively recognise and disclose contingencies as well as asset impairments resulting from negative events, which is consistent with our main result. Overall, our results are robust for a battery of robustness tests, and they support the ‘risk-averse’ view that CEOs will apply the risk sensitivity learned from the Chinese famine experience to the company’s accounting policy decisions to meet the obligations of the contracting parties and other stakeholders.

Keywords: CEO Famine Experience, Accounting Conservatism, Risk-Taking, CEO Behaviour

JEL Classification: M12, M41