CFO Outside Wealth and Financial Reporting Aggressiveness: Evidence from Real Estate Shocks

This study examines the effect of outside wealth on executives’ risk-taking in financial reporting. To investigate this question, I hand-collect data on Chief Financial Officers’ (CFO) real estate assets and use housing returns as a proxy for CFOs’ outside wealth changes. I find that CFOs who experience a large negative housing return become less aggressive in financial reporting, as evidenced by a lower likelihood of restatement. Additional tests show that this effect is driven by CFOs who have less diversified wealth portfolios, by younger CFOs, and by CFOs with more leveraged houses, suggesting that the reduced risk-taking behavior of CFOs stems from decreased diversification of personal wealth and increased career concerns after a negative shock to outside wealth. These findings highlight the important role of executive outside wealth in explaining their risk-taking behaviors.