Aurora Borealis
1 November 2016 CFA Institute Journal Review

CFO Gender and Earnings Management: Evidence from China (Digest Summary)

  1. Pamela G Yang, CFA, CPA, CGMA

A large number of Chinese companies have been accused of accounting fraud, and previous researchers have shown that the chief financial officer (CFO) plays a significant role in a company’s financial reporting. The authors aim to establish a relationship between the gender of the CFO and earnings management for publicly traded companies in China.

What’s Inside?

The authors use timely empirical evidence from China, the world’s largest developing economy, to analyze corporate chief financial officer (CFO) behavior in relation to earnings management. By analyzing data and CFO gender from China’s publicly traded companies, the authors conclude the following: Female CFO firm-years demonstrate significantly lower discretionary accruals, lower total accruals, lower abnormal production costs, and higher abnormal discretionary expenditures; hence, they report lower net income than the male CFO firm-years. In addition, when examining the relationship between CFO gender and earnings management surrounding transitions, the authors find that departing male CFOs are more aggressive than departing female CFOs in managing up earnings during their last year with the firm. The newly appointed male CFOs are also more aggressive than the new female CFOs in managing down earnings during their first year on the job.

How Is This Research Useful to Practitioners?

If earnings quality is in question, investors can gain insight into a firm’s financial reporting by simply looking at the gender of the CFO. A CFO has significant influence on such major corporate decisions as working capital management, budgeting, and capital structure, as well as financial reporting.

Previous researchers have examined earnings quality in relation to CFO gender in US firms and found that firms with female CFOs are associated with a higher quality of accruals, inferring that female CFOs are more conservative than male CFOs in financial reporting.

The authors claim that the United States and China rank as the largest and the second-largest economies in the world, respectively, but the two countries are very different in various aspects, especially in corporate governance and business environment. Therefore, the authors aim to show whether the previously deduced relationship between CFO gender and earnings management also exists in China.

Earnings management can occur through accrual-based management and real activities–based management. Accrual-based earnings management is likely to draw auditors’ attention or regulatory scrutiny, whereas real activities–based manipulations affect operating cash flow. The authors examine both the regulatory and cash flow positions and compare the behaviors of female and male CFOs in China. Their findings for CFOs in China are consistent with those for US counterparts. They suggest that female CFOs engage in less earnings management and are more conservative in financial reporting than their male counterparts, regardless of the institutional and business environments.

How Did the Authors Conduct This Research?

The authors use a much larger sample than the previous study on US firms; it consists of 11,644 firm-year observations over a 12-year period. They obtain the financial data from the China Stock Market and Accounting Research database and its Corporate Governance Research database. The samples are restricted to all nonfinancial firms listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The authors exclude firm-years with negative book equity or without the required data to calculate earnings management measures.

The data show that female CFO representation in China’s corporate sector is relatively high and stable, ranging from 26% to 30%. The authors arrange the data by industry grouping as well as by such firm statistics as ownership and corporate governance characteristics.

One important factor that the authors consider is that in 2006, Chinese regulators issued mandatory accounting standards that are consistent with international accounting standards; thus, the data are split into two subsample periods—before and after the adoption of these accounting standards.

In addition, to study behavior during CFO turnovers, the authors analyze data for 205 female CFOs and 611 male CFOs who departed from their CFO positions during the sample period of 1999–2011. The authors compare the behaviors of male and female CFOs prior to leaving the CFO position and also during their first year on the job. Using these data, the authors first conduct cross-sectional analysis on the difference in earnings management between female CFO firm-years and male CFO firm-years. They then examine the relationship between CFO gender and earnings management surrounding CFO transitions. Both analyses show conclusions consistent with the previous research on US firms.

Abstractor’s Viewpoint

There may be a statistical correlation between CFO gender and earnings management. In practice, however, investors should rely on solid financial analysis to determine a firm’s financial reporting quality rather than the gender of the CFO, especially for publicly traded companies from the largest emerging market country. Multiple factors play important roles in earnings quality. As China matures and increasingly adheres to international accounting and reporting standards, investors should focus on fundamental financial and industry analysis when determining financial reporting quality.

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