Saturday, May 15

CFO or CEO: Who has most influence on earnings management?

Well, the previous idea was that earnings management was primarily driven by the CEO and therefore regulators around the world asked for the remuneration details of the CEO. But recently the SEC has started asking about the remuneration of the CFO as well, which in hindsight, makes perfect sense. After all, the CFO is the person who is actually managing the entire financial process which culminates in the production and propagation of the financial and earnings figures and announcement. A recent paper sheds some more light on this rather interesting and topical issue.

The authors cover the S&P 1500 firms for which CEO and CFO compensation data is available over the 1993 to 2006 period giving a total of 17542 firm years. They judge both cash pay and total pay, the latter including everything else such as option grants, incentive plans, etc. On an average, the CFO earns 1/3 of the CEO with an average equity incentive ratio of 11% for CFO’s compared to 24% for CEOs. Please bear in mind that 2002 saw the introduction of SOXA and the authors do include the impact of this on accounting treatments such as accruals management.

Prior to the introduction of SOXA, there is a positive association between the compensation of both CEO’s and CFO’s with accruals management. In other words, more the incentive, more are the accruals within the financial statements and the influence of the CFO is higher on the accruals management element compared to the CEO. The introduction of SOXA meant that active accruals management was dramatically reduced and there is no longer any relationship between the incentives to CFO and CEO and accrual management.

How about beating analyst forecasts? As you would know, analyst forecasts are extremely important in forming the market sentiments which drive how the market reacts post the earnings announcements. Similar to the above finding, the authors find that pre SOXA, CEO and CFO incentives are positively associated with the likelihood of reporting positive earnings surprises. They also find that greater the incentive, greater was the chance of an earnings surprise. In the post SOXA period, the equity incentives of the CEO is no longer positively associated with the likelihood of beating analyst forecasts. But surprisingly, the CFO is still highly influential in the likelihood of beating analyst forecasts.

The authors also some some additional tests and find:

We also find some weak evidence that earnings management incentives are strongest when the manager has compensation that is more sensitive to stock prices and the firm’s stock returns are more sensitive to accounting earnings.

In other words, the role played by the CFO is almost independent of the CEO at least in terms of accrual management, earnings management and general financial statements to the wider world. If I was a shareholder, I would peer at the CFO much more closely and if there is an element of equity incentive compensation to the CFO, then peer even more closely with a beady eye. I can see analyst models start to incorporate this as a factor. On the flip side, I am sure the CFO’s will be reading this and demanding more cash based compensation compared to stock based compensation. Not sure what the answer is, but it puts further pressure on the remuneration committee, the audit committee, the external auditors and regulators to make sure that the firms are presenting a true and fair picture of the accounts.

John(Xuefeng) Jiang,Kathy R.Petroni and Isabel Yanyan Wang, CFOs and CEOs:Who has the most influence on earnings management?, Journal of Financial
Economics, doi:10.1016/j.jfineco.2010.02.007

Interesting indeed.

Friday, May 14

Recipes in a new format

I have been talking to a tech guru friend of mine, Madhu Menon, who is absolutely a great evangeliser of good User Interfaces and design. So when I saw this, it was such a “great visual” moment for me.

How recipes should look

Brilliant, no?

Monday, May 10

First Islamic exchange to launch in London in May

Interesting news. The first Islamic ETF to help firms raise money. I quote:

The first electronic trading platform allowing sharia-compliant companies to raise cash will launch in London in May, the venture capital firm behind the project told Reuters on Thursday.

The Sharia Ummah Securities Information Exchange (UMEX) is designed to provide a platform to companies with a capital value of at least 20 million pounds ($31 million) and looking to raise the equivalent of at least 20 percent of their market value.

Fascinating stuff, and no, there is no issue elsewhere with interest rates or anything. At least not that I can see. With 10 Islamic Enterprises and over 100 Sharia Compliant Securities on the secondary market through IPOs, this is a good start although I wonder about the liquidity and depth of the market. Is there indeed that much liquidity available on this? Secondly, if there are day traders active on the market, i would posit that that will make it speculation. Which is obviously a bit difficult challenging from a Sharia perspective as you cant make money out of money.

But still interesting to see how this works out and what the returns are. As an aside, I found it eye catching that they appointed a Hindu to run it :), good for them :)

New War Studies course which is totally free

Here’s a great little course, university level course on the lovely topic of war. Yes, it is a topic to be studied well, we humans end up doing quite a lot on and with it, no? We study old one, prepare for new ones, fight new ones, dropping people, money, ideology and stuff into this exercise. My professor said this:


"War makes headlines and history books. It has shaped the international system, prompted social change and inspired literature, art, and music. It engenders some of the most intense as well as the most brutal human experiences and it raises the fundamental questions of human ethics."
- Sir Lawrence Freedman

As the course blurb says:

Its purpose is to provide an introduction, or primer, to the study of war.

War Studies Primer is presented as a lecture curriculum at the university level. It is a free, non-credit, self-study course that consists of 28 lectures and over 1,400 slides and is updated on a yearly basis.

War Studies Primer is licensed for your use and reuse under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 Unported License.

Sunday, May 9


This result is a bit screwy, no? I quote:

The majority of Spaniards, independently of ideology, age and social status, are against the wearing of the hijab, the Islamic headscarf, in schools, while almost half accept the presence of crucifixes in classrooms. The results come from a survey carried out throughout Europe, the European Mindset report, which was commissioned by the BBVA Foundation on the subjects of identity and European vision and values. The findings were published today in the Spanish press. The report, which was carried out at the end of 2009, is not related to the case of the Spanish schoolgirl of Moroccan descent, Nejwa Malha, who was sent home from a school in Pozuelo for wearing the hijab. The report shows that 49% of Spaniards and 54% of Europeans approve of crucifixes being worn, while only 24% of those interviewed in Spain and 26% in Europe are against the idea.

Even in a liberal country like Spain, we have a long way to go for secularism to fully take hold. I also wonder how far did the Madrid bombings influence this? But this doesnt seem to be restricted to Spain, another report here:

A Europe marked by contradictions in its relations with religion emerges from the European Mindset report, commissioned by the BBVA Foundation on European identity, vision and values. The report is based on an opinion poll carried out in 12 EU countries, Turkey and Switzerland. In EU countries, 52.6% of the population refuses the wearing of the Islamic veil, as compared to the exhibition of crucifixes in classrooms which is accepted by 54.4% of those interviewed. The report emphasizes that religion remains an element of division in Europe and that religious values continue to represent a key reference, like ethical principles or family structure. In commenting these results, BBVA Foundation Director, Rafael Pardo, reported by El Pais, underlined that ''there are external religious signs which are already a part of the culture of various societies and the majority of people accept those pertaining to the Christian religion''. The study also shows that in forming a judgment concerning the veil, there is no significant influence of ideology, religion, sex or class of interviewees. Young people and highly educated people are also the most permissive on the use of the Muslim veil in class. Behind the average European's opinion are to be found great differences, for example, between Denmark, in which the greatest number of people are in favour of exhibiting religious symbols, and Bulgaria, France or Germany, in which the greater number of people are contrary. On the other hand, 68% of Europeans (68%) declare their affiliation to some religion, even if the level of religious participation varies a lot. Spain is placed in an intermediate position with a medium-low level of religious participation; on the other hand, as concerns religious affiliation, 72% of the Spanish declare they belong to some religion. On euthanasia, the average European acceptance levels out at 6.3 points over 10, reaching 6.8 in Spain, but is higher in Belgium or Switzerland, the only European country where helping someone to commit suicide is not a crime. Abortion divides European public opinion the most: just over half of the Spanish are in favour of abortion, which provokes a greater refusal in countries where religion is more practiced, such as in Catholic Poland, Orthodox Greece or Muslim Turkey.

And the boring Belgians, not having anything else to do, like running their own country with a stable government, decide to go ban the burqa.

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