Military Managers and Earnings Management

Abstract

How does previous military experience affect corporate managers’ behavior in earnings management? Using a sample of listed Chinese firms, we find that managers with military experience are associated with higher levels of earnings management, through both accrual-based and real-activities manipulations. Firms run by military managers are more susceptible to financial restatements, qualified audit opinions, and penalties for violation. To alleviate endogeneity problems, we use both the instrumental variable regression and a propensity score matching approach, and our results are robust. In addition, the effect of military managers is more pronounced in state-owned firms and firms with weak internal control systems. These findings improve our understanding of the link between managerial traits and corporate financial reporting decisions.