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.
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: email@example.com
Seppo Ikäheimo, Aalto University
Title: "Does CEO IQ improve earnings persistence?"
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.