Real earnings management in innovative firms: Does CEO profile make a difference?

- We examine the relationship between CEO profile and real earnings management in European innovative firms.
- Real earnings management is measured by the index of Cohen et al. (2008).
- Managerial psychological and demographical traits are positively and strongly associated with REM in the more innovative firms.
- Leaders' personal characteristics motivate them to focus on the short-term.

The purpose of this paper is to determine and test the effect of CEO profile including behavioral biases and demographic traits on the level of real-based earnings management (REM) in European innovative firms. Drawing on the literature on behavioral theories of leadership, neoclassical agency theory, prospect theory and signal theory, literature is developed, and hypotheses are generated, regarding CEOs attitudes toward manipulations and innovations. Data from a sample of 190 European firms and 460 CEOs spanning the years 2000-2014 are used to test the model using panel data and multiple regression. We split the total sample in two sub-samples according to the R&D intensity. Firms with high R&D intensity are considered more innovative. Not surprisingly, we find that managerial psychological and demographical traits are positively and strongly associated with REM in more innovative firms.