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School of Business | Department of Accounting | Accounting | 2016
Thesis number: 14727
The effect of founder CEO on earnings quality
Author: Narinen, Saija
Title: The effect of founder CEO on earnings quality
Year: 2016  Language: fin
Department: Department of Accounting
Academic subject: Accounting
Index terms: laskentatoimi; johtaminen; johtajat; palkkiot; laatu; benchmarking
Pages: 60
Key terms: earnings quality; earnings persistence; founder; CEO

The objective of this thesis is to find out whether the earnings quality is higher in firms with the founder serving as Chief Executive Officer (CEO) in comparison to other firms. In this thesis earnings quality is measured by earnings persistence. To deepen the analysis, the research aims to examine whether the anticipated better earnings persistence is related to better persistence of cash flow, accruals or both of these components of earnings. In addition, this research investigates if the founder CEOs have higher ownership of the company than other CEOs. It is alleged that even 50% of public US corporations are controlled by founding families, which shows what a powerful ownership form founder families actually are. Only a few studies concentrate on the relationship between founder family firms and earnings quality and none between the founder CEO and earnings persistence. The results of this thesis reveal important information about the quality of financial reporting among different companies, which shareholders might find useful when making decisions.


The data extends from 1994 to 2013 and comprises firms which are members of the Standard and Poor's 1500 (SP1500) index. The performance information of firms is collected from Compustat North America Fundamentals Annual File and the information about founders is collected from ExecuComp database. The data was analyzed using SAS 9.4. software to run t-test, descriptive statistics, correlation and regression analysis following Sloan's (1996) approach.


The study does not find statistically significant evidence on the founder CEOs impact on earnings persistence. When it comes to decomposing earnings into the cash flow and accrual component, the results are statistically insignificant as well. Nevertheless, when the ownership of CEOs is examined, the results suggest that the founder CEOs own a bigger number of the company's shares than other CEOs in the SP1500 firms.

In the end of the empirical part, a few sensitivity tests are conducted. The test concerning the industry distribution reveals that the high technology firms have a significant proportion in the sample. The regression analysis exercised within high technology industry shows that the founder CEOs in high technology companies have slightly higher earnings persistence than the comparison group. The sensitivity test concerning the CEOs' ownership reveals that both the earnings persistence and the performance in firms where the founder CEOs own a high number of the company's shares are on the same level as in the comparison group. The elimination of industries with no founder observations do not provide any new information.
Master's theses are stored at Learning Centre in Otaniemi.