Individualistic CEOs and financial misstatements

Using the uncommonness of first names as a proxy for individualism at the personal level, we find that individualistic chief executive officers (CEOs) are 50–60% more likely to make financial misstatements and are approximately twice as likely as other CEOs to have irregularities (i.e., material and fraudulent misstatements). We further document that this positive relationship is mitigated by the presence of an independent board and is amplified when individualistic CEOs are socially active or when the management team’s ability is low and thus the likelihood of poor underlying financial performance is high. We address potential selection issues with difference-in-differences tests using CEO turnovers and tests based on various matching methods. Specifically, we find that when a non-individualistic CEO (individualistic CEO) is succeeded by an individualistic CEO (non-individualistic CEO), the likelihood of misstating earnings increases (decreases). Moreover, our results are robust to the inclusion of a battery of controls for CEO personal traits, including CEO overconfidence, CEO narcissism and CEO myopia. Overall, our findings suggest that the cultural background of managers significantly influences their corporate behavior.