Business Education of CEO-CFO and Annual Report Readability

 

Abstract:

 Financial report readability captures the transparency and effectiveness of information communicated by firms’ executives.  It’s interesting to investigate whether business knowledge, cognitive preferences, and professional ethics taught by a business education will shape the CEO/ CFO’s thinking in determining words, languages, paragraphs, and contents presented in financial reports when the self-interested CEO/CFO tends to influence the interpretation of financial information users.  Using a sample of S&P 1500 CEOs and CFOs, we find that the CEO (CFO) with a business degree is associated with better (worse) readability of annual reports and the positive (negative) relation is strengthened (moderated) by internal corporate governance and external analyst following.  Furthermore, we explore the interaction between CEO’s and CFO’s education background and provide additional evidence for the conflict of interest between CEOs and CFOs on financial reporting strategies.  Our findings suggest business education, although has no direct impact on financial reporting quality, is beneficial to CEOs for strengthening their monitoring role in firm’s financial reporting activities.  Also, we consider that the ethical topics in business education can enhance financial executives’ awareness to conduct practice under the ethical codes.  Our study has implications for academic literature, business education, industry practitioners, and standards setting.

 

Keywords: 

Readability of 10-Ks; Business education; Executives’ educational background; Financial reporting; Corporate governance  

 

JEL Classifications:

A20, M41, M51, M54  

 

Citation as:  

Tuo, L., Zhang, Y., Liu, Z. F., and Du, R.X. (2019). "Business Education of CEO-CFO and Annual Report Readability", Review of Economics & Finance, vol.17, no.3, pp. 16-34.