An Examination Of Narcissistic And Non-Narcissistic CEO’s Financial Reporting Behavior During Times Of Market Euphoria And Crashes

Abstract

The United States markets are in a cyclical pattern of experiencing market highs (euphoria) and lows (crashes) and financial statement reporting during these times has a large impact on investors and the economy. This research examines how CEO narcissism affects financial reporting behavior, through aggressive financial reporting and real earnings management, in times of both euphoria and crashes, looking specifically at the dot com and housing bubbles and their subsequent crashes. Because narcissists perceive heightened benefits and have aggressive reactions to feeling questioned, it is expected that narcissistic CEOs will amplify their financial reporting aggressiveness and real earnings management in times of both market euphoria and crashes. Aggressive financial reporting and real earnings management are measured using abnormal accruals and abnormal operating cash flows, respectively. The results indicate that while CEO narcissism is positively associated with real earnings management, it is not significantly associated with aggressive financial reporting. The results show that narcissistic CEOs reduce real earnings management during crash years, and independent of narcissism, financial reporting aggressiveness is lower in crash years while real earnings management is higher in euphoria years. This research adds to the accounting and managerial reporting behavior literature and can be used by investors, regulators, and auditors to attempt to mitigate the risk associated with a volatile market.