Testosterone and Financial Misreporting

May 21, 2013 Leave a comment

Testosterone and Financial Misreporting

Yuping Jia Frankfurt School of Finance and Management

Laurence Van Lent Tilburg University – CentER for Economic Research and Dept. of Accounting

Yachang Zeng Tilburg University – Department of Accounting & Accountancy; Tilburg University – Center for Economic Research (CentER)

May 15, 2013

Abstract: 
We examine the relation between a measure of CEOs’ adolescent exposure to the hormone testosterone and financial misreporting. Testosterone is associated with a set of behaviors in males, including aggression, egocentrism, risk seeking, and a desire to maintain social status. Using a sample of CEOs from Standard and Poor’s 1500 firms during 1996–2010, we document a positive association between our measure of CEO testosterone exposure and financial misreporting. Our primary evidence is based on a sample of financial restatements due to intentional irregularities. Additional analyses are based on misreporting proxies derived from the misstatement-prediction model proposed by Dechow et al. [2011]. The positive association between CEO testosterone exposure and financial misreporting is robust to the various misreporting proxies. We show that our measure of testosterone exposure is different from overconfidence, which prior studies have shown to be associated with misreporting. Finally, we demonstrate that testosterone exposure not only correlates with financial reporting decisions but also predicts the incidence of option backdating in the sample.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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