Top Management Team Characteristics and Financial Reporting Quality

The accounting literature often views managers as individuals whose financial reporting decisions are determined by their economic incentives and individual characteristics. However, managers typically work in a team and most decisions have at least some input from other members of the team. This study examines the impact of top management team (TMT) characteristics on financial reporting quality, as proxied by accounting restatements and both accrual and real earnings management. The results indicate that firms with TMTs that have more similar backgrounds and longer experience working together are more likely to misreport their financial statements. Additional tests document that these firms also engage in more accrual and real earnings management when they face income-increasing earnings management incentives. Moreover, the impact of TMTs on financial reporting quality varies with board compositions. TMT shared experience and homogeneity are more positively related to restatements for firms with lower percentage of independent directors and longer-tenured audit committee members. These findings indicate that top management team characteristics are important determinants of firms’ financial reporting quality.