Chad Ham, assistant professor of accounting at Washington University in St. Louis’ Olin Business School, and his co-authors found a chief financial officer (CFO) with an oversized signature is more likely to make questionable choices due to an oversized ego.
According to a paper published in the December edition of the Journal of Accounting Research, “narcissistic CFOs are less likely to recognize losses in a timely manner … consistent with a willingness to cover up past mistakes.”
Ham and collaborators connected the dots between the size of a CFO’s signature, that person’s level of narcissism, and, in the end, the nature of their corporation’s financial reporting.
“The purpose of our work isn’t to advocate for signature size as a measure of narcissism,” Ham said, “it’s to study how executive narcissism affects firm behavior.”
Ham and the research team also compared the performance of the companies before and after the CFO was appointed. In the case of the narcissistic CFOs, Ham said, “the firms became more aggressive when these CFOs were appointed.”
That paper was part of a one-two punch Ham and his collaborators delivered linking management results from both CFOs and CEOs with their level of narcissism. A second paper focusing on CEOs has been accepted for publication in the Review of Accounting Studies.
The researchers found much the same pattern in the CEO study. Though not directly responsible for the financial reporting in the company, the paper shows that narcissistic CEOs — those with larger signatures — tended to over-invest in riskier projects and received higher compensation in spite of poorer financial performance.
“Part of what’s unique about our research is how we’re capturing narcissism,” Ham said. Researchers could not simply ask top corporate executives to submit to a personality test, so signature size became a proxy for their level of their narcissism.
The research team, which included Mark Lang from the University of North Carolina at Chapel Hill; Nicholas Seybert from the University of Maryland; and Sean Wang from Rice University, staged an experiment to confirm previous research linking signature size and narcissism.
The researchers paired student volunteers, asking them to allocate $5 between themselves and their anonymous partners. Each was given a default allocation of $2.50. The students could stay with the default amount or decide to keep a larger or smaller amount for themselves — knowing that their anonymous partner was given the same task. After that assignment, the students had to fill out a personality test and sign their names.
The results showed that the students with larger signatures tended to be more narcissistic. Said Ham: “The more narcissistic participants were more likely to keep a larger share of that $5 endowment for themselves — to misreport their default allocation.”
The next step was to expand the scope of their view with a field experiment. They reviewed data from more than 500 companies whose CFOs’ notarized signatures were in the public record.
“We were able to show a relationship between CFO narcissism and aggressive financial reporting choices,” Ham said. The errors or misreporting took the form of: overly aggressive accrual choices; a higher-than-expected level of restatements; and real activities (such as slashing advertising expenses near the end of a year to depress expenses and increase earnings).
So, should corporate boards just steer clear of CEOs and CFOs who sign their John Hancock like … well, John Hancock?
Ham says no. It isn’t that simple.
“If you want to glean anything from signature size,” Ham said, “you need to have a large sample. It’s an ‘on-average’ effect.”
A narcissistic CFO might benefit the company in other ways — ways that aren’t measured in this study.
At most, Ham said, corporate leaders should be aware of their C-suite occupants’ narcissistic tendencies: “You might want to make sure you have appropriate checks and balances in place,” he said.