The Impact of an Expat CFO on Corporate Performance

A STUDY ON THE EUROPEAN COMPANIES INCLUDED IN THE EURO STOXX 600 INDEX SHOWS THAT MANAGERS OPERATING IN COUNTRIES WITH A CULTURAL CONTEXT DIFFERENT FROM THEIR OWN HAVE A MAJOR IMPACT ON CORPORATE OPERATIONS

by Antonio Marra, Dept. of Accounting, Bocconi
Translated by Alex Foti


It is the country that adapts to the Chief Financial Officer (CFO), rather than the other way around. At least, this is what emerges from an analysis of the impact of foreign CFOs on the financial reporting of European companies.

In modern economies, the importance of stock markets, as well as the ever-increasing demand for economic and financial data through which the performance of companies can be compared, have led to increasing pressure on companies and management to exhibit results that are satisfactory for all stakeholders. In this context, earnings management and business accounting have come to play a key role, also because they can be used opportunistically to disguise mediocre performance, often caused by wrong strategic choices, lack of innovation, or managerial myopia.

Given its relevance, earnings management has been one of the most studied topics by accounting researchers in the last thirty years. Among the various strands of research on the topic, there is one that looks at the incentives underlying opportunistic behavior. In fact, there are many reasons for the manipulation of financial statements and the consequent distortions in financial reporting. These reasons may be linked to the imperatives of corporate performance, the personal interest of management (for example, with respect to their compensation or permanence in the company), or to factors related to the business environment. With regard to context factors, very few studies have analyzed the impact that an individual placed in an influential managerial position can have on the business context whose culture is different from the one where he/she was born and raised. Research into psychology and human capital highlight how the personality, as well as the moral values of individuals, are formed in the family environment during adolescence and are not significantly altered afterwards. These values help shape the style of management of a given person, especially, when he/she operates in a country other than their own.
 
Starting from these premises, I have analyzed the role that the CFO, in his/her quality as the "custodian of the quality of financial reporting", plays in determining earning management and, ultimately, the overall quality of the accounting data being reported. The analysis was carried out on companies located in 15 different EU countries that are included in the Euro Stoxx 600, for the period from 2006 to 2015. My findings show that CFOs having a distinctive managerial style developed in their own native countries positively affect the quality of the financial reporting in the company where they operate. Furthermore, it appears that foreign CFOs (expats operating outside the countries where they were born and trained) are able to produce accounting documents of a higher quality with respect to their home-grown counterparts. More in detail, the results also suggest that that the nationality of the CFO does not have a uniform impact on financial reporting: only CFOs coming from countries more oriented to the protection of investors who move to countries where such protection is weaker contribute positively, and significantly, to the quality of the financial data of reported by companies.
 
The individual thus manages to overcome the weight of local habits and lead the company to an improvement in the overall quality of accounting statements. On the other hand, when CFOs move from a country with a low propensity to protect investors to a country with high investor protection, they do not significantly affect the quality of their companies’ accountability. In this case, the environmental factors seem to prevail on individual factors. Such empirical evidence points towards interesting scenarios: the cultural values of individuals, as identified by their country of origin, are able to significantly influence companies (and therefore, indirectly, also the business context) where they works as financial directors. And this seems to be particularly the case when the style of management of the CFO diverges more markedly from the context factors of the host nation.