The Effect of CEOs' Financial Knowledge on Unsystematic Risk, Considering the Moderating Effect of Managerial Ability

Document Type : Review article

Authors

• Bahram Ghanizadeh ¹
• Mohsen Dastgir ²
• Afsaneh Soroushyar ²

¹ Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

² Department of Accounting, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

10.22067/ijaaf.2022.42034

Abstract

With the emergence of economic globalization, expansion of business activities and more complex financial, administrative and operational structures, the need for firms to have CEOs with capable financial and managerial knowledge has multiplied more than in the past. Leading companies will require specialized human capital such as knowledge-based CEOs to bring maximum productivity, efficiency, and value creation to stakeholders through effective corporate governance, risk management, optimal organizational resources, and increased profitability. This study investigates the effect of CEO knowledge and management ability on non-systematic risk and the effect of management ability on the relationship between the CEO's financial knowledge and unsystematic risk. The statistical population of this study is the companies listed on the Tehran Stock Exchange and the statistical sample size includes 147 companies for the years 2011 to 2020, which have been selected by the systematic elimination method.­ Combined data and multivariate regression using the generalized least squares method have been used to test the research hypotheses. The results show that the financial knowledge of CEOs has a negative and significant effect on non-systematic risk. The effect of management ability on non-systematic risk is also negative and significant. Another result of the study indicates that management's ability as a moderating variable does not have a positive and significant effect on the relationship between the financial knowledge of CEOs and non-systematic risk.

Keywords

• CEOs' Financial Knowledge
• Managerial Ability
• Unsystematic Risk

Main Subjects

• Accounting

---

©2022 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

References

1. Amit, R. and Shoemaker, P. (1993). Strategic assets and organizational rent, Strategic Management Journal, 14(1), pp. 33–46.
2. Anderson, H.D., Liao, J. and Yue, S. (2022), Financial expert CEOs, political intervention, and corporate investment decisions: evidence from the anti-corruption campaign, International Journal of Managerial Finance, 18 (3), pp. 562-593. https://doi.org/10.1108/IJMF-12-2020-0622
3. Andreou, P. C., Ehrlich, D. and Louca, C. (2013). Managerial Ability and Firm Performance: Evidence from the Global Financial Crisis. Department of Commerce, Finance and Shipping, and Visiting Research Fellows at Durham Business School. Cyprus University of Technology, Cyprus
4. Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross‐section of volatility and expected returns. The journal of finance, 61(1), 259-299.
5. Ashafoke, T., Dabor, E. and Ilaboya, J. (2021). Do CEO Characteristics affect Financial Reporting Quality? An Empirical Analysis. Acta Universitatis Danubius. Economica, 17(1). pp.156-176.
6. Baik, B., Brockman, P. A., Farber, D. B. and Lee, S. (2011). CEO Ability and Management Earnings Forecasts. Contemporary Accounting Research, 28 (5), pp. 1645–1668. https://doi.org/10.1111/j.1911-3846.2011.01091.x
7. Bali, T. G., & Cakici, N. (2008). Idiosyncratic volatility and the cross section of expected returns. Journal of Financial and Quantitative Analysis, 43(1), 29-58.
8. Behmanesh, M., Totianisfahani, S. and Mirsepasi, N. (2020). The investigation of the association between CEO financial expertise and financial policies in firms enlisted Tehran Stock Exchange. Journal of business management, 12(47), 267-290. (In Persian).
9. Chen, X., Liu, C., Liu, Z. and Huang, Y. (2020). Corporate Financial Portfolio and Distress Risk: Forewarned is Forearmed. Working Paper, Shandong University, China
10. Custódio, C. and Metzger, D. (2014). Financial expert CEOs: CEO's work experience and firm's financial policies. Journal of Financial Economics, (114)1, pp. 125–154.
11. Damodaran, A. (2000). Models of Risk and Return. New York University Stern School of Business.
12. Demerjian, P.R., Lev, B., Lewis, M. F. and McVay, S.E. (2013). Managerial Ability and Earnings Quality. The Accounting Review, (88)2, pp. 463–498.
13. Deng, J., Li, C., Frolking, S., Zhang, Y., Bäckstrand, K., & Crill, P. (2014). Assessing effects of permafrost thaw on C fluxes based on multiyear modeling across a permafrost thaw gradient at Stordalen, Sweden. Biogeosciences, 11(17), 4753-4770
14. Durnev, A., Morck, R. and Yeung, B. (2004). Value enhancing capital budgeting and firm-specific stock returns variation. Journal of Finance, 59(1), pp. 2013-611.
15. Elgebeily, E., Guerm., C. and Vendrame,V. (2021). Managerial optimism and investment decision in the UK. Journal of Behavioral and Experimental Finance.31(9), pp. 1-11. https://doi.org/10.1016/j.jbef.2021.100519
16. Fallah pour, S. (2014). Application of stable model in selecting optimal stock portfolio. Journal of Accounting Knowledge,10(3),67-84.
17. Francis, J., Nanda, D. and Olsson, P. (2008). Voluntary disclosure, earnings quality, and cost of capital. Journal of accounting research, 46(1), pp. 53-99.
18. Gholipour Khanegah, M., Eyvazloo, R., Mahmoodzade, S. and Rameshg, M. (2017). Idiosyncratic Risk and Market Friction in Investment Process. Journal of Investment Knowledge, 6(22), pp. 13-27. (In Persian).
19. Gordon, L. A., Loeb, M. P. and Tseng, C. Y. (2009). Enterprise risk management and firm performance: A contingency perspective. Journal of Accounting and Public Policy, 28 (4), 301-327
20. Gounopoulos, D. and Pham, H. (2018). Financial expert CEOs and earnings management around initial public offerings. The International Journal of Accounting, 53(2), pp. 102-117. https://doi.org/10.1016/j.intacc.2018.04.002
21. Gounopoulos, D., Loukopoulos, G. and Loukopoulos, P. (2021). Do Financial Expert CEOs Matter for Newly Public Firms?, Working Paper, University of Bath, England
22. Goyal, A., & Santa‐Clara, P. (2003). Idiosyncratic risk matters!. The journal of finance, 58(3), 975-1007.
23. Hambrick, C. D. and Mason, P.A. (1984). Upper echelons: The organization as a reflection of its top managers, Academy of management review, 9(2), pp. 193-206.
24. Harrison, J. S., Thurgood, G. R., Boivie, S. and Pfarrer, M. D. (2020). Perception is reality: How CEOs’ observed personality influences market perceptions of firm risk and shareholder returns. Academy of Management Journal, 63(4), pp. 1166-1195. https://doi.org/10.5465/amj.2018.0626
25. Hull, J. C. (2015). Risk Management and Financial Institutions, Fourth Edition, Published by John Wiley & Sons, Inc., Hoboken, New Jersey
26. Kalelkar, R. and Khan, S. (2016). CEO financial background and audit pricing. Accounting Horizons, 30(3), pp. 325-339. https://doi.org/10.2308/acch-51442
27. Kim, Y., Kim, M. and Mattila, A. S. (2017). Corporate social responsibility and equity-holder risk in the hospitality industry. Cornell Hospitality Quarterly, 58(1), pp. 81-93. https://doi.org/10.1177/1938965516649052
28. Lee, C. F., Hu, C. and Foley, M. (2021). Differential risk effect of inside debt, CEO compensation diversification, and firm investment. Review of Quantitative Finance and Accounting, 56(2), pp. 505-543. https://doi.org/10.1007/s11156-020-00901-0
29. Masry, M. and El Menshawy, H. (2018). The Impact of Unsystematic Risk on Stock Returns in an Emerging Capital Markets Emerging Capital market Country: An Empirical Study in Egyptian Stock Exchange. International Journal of Financial Research, (9)1, pp. 189-202.
30. Matsunaga, S. R., Wang, Sh. and Yeung, P.Y. (2014). Does Appointing a Former CFO as CEO Influence a Firm’s accounting and Disclosure Policies?, Working Paper, University of Oregon, Oregon
31. Misfiyati, A. L. (2018). Pengaruh risiko sistematis dan risiko tidak sistematis terhadap expected return portofolio optimal. Prosiding 2nd Business and Economics Conference In Utilizing of Modern Techonolgy, Magelang, Indonesia
32. Novianggie, V. and Asandimitra, N. (2019). The Influence of Behavioral Bias, Cognitive Bias, and Emotional Bias on Investment Decision for College Students with Financial Literacy as the Moderating Variable. International Journal of Academic Research in Accounting, Finance and Management Sciences, 9(2), pp. 92–107. https://doi.org/10.6007/IJARAFMS/v9-i2/6044
33. Oradi, J., Asiaei, K. and Rezaee, Z. (2020). CEO financial background and internal control weaknesses. Corporate Governance: An International Review, 28(2), pp. 119-140. https://doi.org/10.1111/corg.12305
34. Paramitasari, R. (2014). Pengaruh Risiko Sistematis Dan Risiko Tidak Sistematis Terhadap Expected Return Saham Dalam Rangka Pembentukan Portofolio Saham Lq-45 Yang Terdaftar Di Bursa Efek Indonesia Dengan Single Index Model Periode Tahun 2009. Jurnal Organisasi dan Manajemen, 10(1), pp. 78-83.
35. Parmar, B. L., Freeman, R. E., Harrison, J. S., Wicks, A. C., de Colle, S. and Purnell, L. (2010). Stakeholder Theory: The State of The Art. The Academy of Management Annals, 3(1), pp. 403-445.
36. Pramuki, W. A., Subroto, B. and Subekti, I. (2016). Do investors become risk takers after receiving MLA and accounting information?. Journal of Economics, Business & Accountancy Ventura, 19(2), pp. 283-292.
37. Raei, R. and Saeedi, A. (2017). Fundamentals of financial engineering and risk management. Samt Publications, Iran, (In Persian).
38. Rahnamay Roodposhti, F. and Salehi, A. (2011). Theories and schools of finances and accounting. Islamic Azad University of Tehran Branch Publications. Iran, (In Persian).
39. Rashidi, M. (2020). The Role of Managers' Ability to Modify Credit Conditions and Reduce Share Returns spread. Journal of Asset Management and Financing, 8(3), pp. 123-139. (InPersian).
40. Saedi, R. and Rezaein, V. (2019). The effect of the manager’s excessive self-confidence on stock returns and unsystematic stock risk given the dual role of managing director: Evidence from Tehran Stock Exchange. Financial Research Journal, 21(1), pp. 79-100. (In Persian).
41. Simamora, A.J. (2021). Firm’s performance, risk taking and managerial ability. International Journal of Productivity and Performance Management, ahead-of-print( ahead-of-print). https://doi.org/10.1108/IJPPM-03-2021-0172
42. Singh, S. and Luthra, R. (2013). A comparative study of trends in corporate capital structure pattern of refinery and metal industry. Asia Pacific Journal of Marketing & Management Review, 2(6), pp. 11-21.
43. Soleimany Amiri, Gh. and Gerveie, P. (2017). The Impact of Managerial Overconfidence on Systematic and Unsystematic Risk. Journal of Accounting Advances, 9(1), pp. 99-124. (In Persian).
44. Sukrianingrum, D. R. and Manda G. S. (2020). The effect of systematic risk and unsystematic risk on expected return of optimal portfolio. SAR (Soedirman Accounting Review): Journal of Accounting and Business, 5(2), pp. 181-195.
45. Taheri Abed, R., Alinezhad Sarokolaei, M. and Faghani Makerani, KH. (2018). Ability, Coe’s Financial Knowledge and Financial Reporting Transparency. Financial Accounting Knowledge, 5(2), pp. 85-110. (In Persian).
46. Wati, E. R., Tjaraka, H. and Sudaryati, E. (2020). Do Managerial Ability Impact Indonesian Firm Risk-Taking Behavior?. AKRUAL: Jurnal Akuntansi, 12(1), pp. 18-33. https://doi.org/10.26740/jaj.v12n1.p18-33
47. Ying, Q. and He, S. (2020). Is the CEOs’ financial and accounting education experience valuable? Evidence from the perspective of M&A performance, China Journal of Accounting Studies, 8(1), pp. 1-32. https://doi.org/10.1080/21697213.2020.1822023
48. Yung, K. and Chen, C. (2018). Managerial ability and firm risk-taking behavior. Review of Quantitative Finance and Accounting, 51(4), pp. 1005-1032. https://doi.org/10.1007/s11156-017-0695-0
49. Zalaghi, H., Bayat, M. and Daneshasgari, T. (2014). The Impact of Management Earning Forecast on Non-systematic Risk. Financial Management Strategy, 2(2), pp. 121-136. (In Persian)
50. Zarei, H., Dahmarde Ghaleno, M., JafariJam, H. and Rakhshani, F. (2018). CEOs’ Decision-making Power and Stock Price Crash Risk: Evidence from Iran. Iranian Journal of Accounting, Auditing and Finance, 2(3), pp. 29-47. (In Persian)
51. Zarif fard, A. and Ghaemi fard, M.H. (2001). Experimental test of capital asset pricing model in Tehran Stock Exchange. Social and Human Shiraz University Journal, 19(2), pp. 41-53. (In Persian)