Research Presentation by Dr. Shelagh Campbell and Dr. Zhou Zhang

Fri., Nov. 22, 2013 10:30 a.m.

Location: Education Building, Room 558

The Faculty of Business Administration hosts a regular Speakers Series, including regular Research Presentations by Faculty members (October through April).

Our next presentation will be "The Impact of Corporate Executives’ Joint Tenure on Financial Reporting after Sarbanes Oxley: An Occupational Community Perspective"
Paper by Shelagh Campbell, Yingqi Li, Junli Yu & Zhou Zhang
Presented by Dr. Shelagh Campell & Dr. Zhou Zhang

Abstract

The recent history of business is the story of scandal; not just missteps and mistakes but outright criminal activity. Regulatory changes including the 2002 Sarbanes Oxley Act (SOX) attempted to enhance financial reporting quality and thus reduce information noise and opportunities for fraud. Within organizations, however, executives still must make decisions whether or not to comply with reporting standards, best practices, industry norms and ultimately whether to make ethical decisions. The prior literature in this area addresses individual characteristics of decision makers and social networks among executives and boards of directors, but to this point has largely overlooked group dynamics of the executive team. Our study fills the gap and examines the relationship between executives’ joint tenure and the quality of corporate financial reporting.

In this study, we construct a unique joint tenure measure for the CEO/CFO relationship that is manually complied from several financial databases during the 2006-2011 period. We also use the disclosure information of SOX 404, either effective or material weakness, as the proxy for the financial reporting quality. The SOX 404 requires the external auditors to independently attest that they have evaluated the effectiveness of the corporate internal controls over financial reporting. Our evidence shows that the number of years of CEO/CFO joint tenure is significantly and negatively associated with the internal control weakness, after controlling for common determinants of internal control weakness. In other words, our study shows that the longer the executive relationship, the less likelihood of internal control weakness. Our main findings remain quantitatively the same after several robustness checks, including propensity score matching and alternative internal control measures. Our study suggests that the attributes of an occupational community contribute to better financial reporting.