CEO power and CEO hubris: a prelude to financial misreporting?

The purpose of this paper is to explore how the tension between a firm’s CEO power features and externally observable hubris attributes may determine the likelihood of financial misreporting.

The analyses are based on a sample of 16 Canadian firms for which there were formal accusations of financial reporting fraud filed by securities regulators, assorted with regulatory sanctions; as well as 16 firms matched on industry and size with no evidence of financial misreporting.

The findings suggest that firms accused of financial misreporting exhibit features of strong CEO power and hubris as reflected in their relations with the self, others and the world. Governance mechanisms do not seem to be effective in detecting or preventing financial misreporting, with independent boards of directors proving especially ineffectual.

Social implications
The findings suggest that formal governance processes may get coopted by a CEO with hubristic tendencies.

While the tentative model is more explanatory than predictive, it opens up a new research area as it brings the concept of hubris into accounting research.

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