CEO political ideology and firms' financial reporting practice

Abstract

Existing literature suggests that political conservatism is associated with the psychological trait of risk aversion. Meanwhile, behavioral consistency theory conjectures that managerial personal risk attitude may influence corporate risk-takings. Accordingly, this study investigates whether CEO political ideology, measured by individual political donations, affects firm's propensity of risk-takings on financial reporting practice. In particular, I examine two major aspects of financial reporting practice: accounting conservatism and annual report readability. Using a sample of federal-level campaign contributions by historical S&P 500 CEOs, I find that Republican oriented CEOs, who tend to have conservative ideology, are associated with more accounting conservatism and higher annual report readability than Democratic oriented CEOs. These results are also consistent with the prediction of upper echelons theory that managers' individual values have influence on corporate strategies and outcomes. Further tests demonstrate that the empirical results are robust to alternative measures of conditional conservatism, annual report readability, and political ideology. Taken together, the empirical findings of this study suggest that managers with strong political preference have discretion to translate their personal risk attitude into firm's accounting decisions.