VGSF - WU Vienna - LC

Seppo Ikäheimo, Aalto University

online via Microsoft Teams 10:00 - 11:00

Organizer WU Vienna

The Fin­ance Brown Bag Sem­inar is held by the In­sti­tute for Fin­ance, Bank­ing and In­sur­ance (WU Vi­enna) and the Vi­enna Gradu­ate School of Fin­ance (VGSF). It serves as a present­a­tion plat­form for PhD stu­dents, fac­ulty mem­bers, and vis­it­ors. An over­view of BBS on the web­site of the In­sti­tute for Fin­ance, Bank­ing and In­sur­ance.

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May 13th, 2020, 10:00-11:00 am
You can par­ti­cip­ate in the sem­inar on­line via Mi­crosoft Teams
The meet­ing will open at 9:45 am for you to dial in. To join the stream please fol­low this link.
In case of tech­nical prob­lems please con­tact: patrick.weis­s@wu.ac.at

Seppo Ikäheimo, Aalto Uni­versity

Title: "Does CEO IQ im­prove earn­ings per­sist­ence?"

Ab­stract

The pur­pose of this pa­per is to ex­am­ine whether in­di­vidual CEO’s cog­nit­ive ab­il­ity, cap­tured by IQ, in­flu­ences com­pany’s earn­ings per­sist­ence and op­er­at­ing cash flow (OCF) pre­dict­ab­il­ity. It is ex­pec­ted that CEOs with higher cog­nit­ive ab­il­it­ies are able to make bet­ter es­tim­ates of fu­ture earn­ings and OCF, res­ult­ing in more per­sist­ent earn­ings and more pre­dict­able OCF. More per­sist­ent earn­ing is a widely used proxy for earn­ings qual­ity and more pre­dict­able OCF in­dic­ate higher ab­il­it­ies to make more re­li­able busi­ness plan­ning. Our find­ings provide sup­port for these ar­gu­ments, as the res­ults in­dic­ate that CEO IQ en­hances both earn­ings per­sist­ence and OCF pre­dicat­ab­il­ity. When ex­amin­ing the per­sist­ence ef­fect of ac­cru­als and op­er­at­ing cash flows on fu­ture earn­ings and OCF, we find that CEO IQ en­hances both of these com­pon­ents. The res­ults hence sug­gest that greater IQ may re­duce the meas­ure­ment and es­tim­a­tion er­rors of ac­cru­als, and in­crease the per­sist­ence of cash com­pon­ent by bet­ter use of cash flows. Moreover, the res­ults in­dic­ate that the im­pact of CEO IQ on per­sist­ence is evid­ent only among sub­-samples of mi­cro and small-s­ized com­pan­ies, im­ply­ing that the role of CEO de­pends on the ex­tent of ma­na­gerial dis­cre­tion avail­able. Fi­nally, the ex­ist­ence of ef­fect­ive ex­ternal veri­fic­a­tion of fin­an­cial re­ports seems to play a role as the CEO IQ in­flu­ence dis­ap­pears when a com­pany is audited by a big audit firm. Over­all, util­iz­ing unique data on CEO IQ and com­pre­hens­ive data on fin­an­cial state­ments of com­pan­ies from mi­cro to large com­pan­ies, this pa­per con­trib­utes to the scarcely in­vestig­ated top­ics of the role of in­di­vidual CEO ab­il­it­ies in re­port­ing qual­ity and es­tim­at­ing fu­ture cash flows espe­cially in smal­ler firms.



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