A Study on Inventor CEO Experience, Governance Mechanisms, and Earnings Management

The present study investigates the relationship between CEO inventor experience and earnings management. By drawing on research on individual motivations, our study first establishes that a CEO’s inventor experience is a reflection of his or her intrinsic motivation. We then propose that, given the intrinsic nature of the inventor CEO’s motivation orientations, he or she will be less likely to engage in earnings management, which is a commonly used form of impression management. We propose that intrinsically motivated CEOs put less value on external rewards such as getting recognition and obtaining a bonus and, as a result, will be less likely to engage in earnings management. Moreover, we focus on the moderating roles of two prominent controlling governance mechanisms—board independence and institutional ownership. By relying on research on motivational crowding-out and cognitive evaluation theory, we suggest a positive interaction effect on the relationship between CEO inventor experience and earnings management such that the stronger the monitoring mechanisms, the relationship between CEO inventor experience and earnings management will become positive. We test our hypotheses using a panel of US firms between 1996-2017 and find strong support for all our hypotheses. The implications of these findings are discussed.