Are CFOs (Chief Financial Officers) Valuable or Powerful?

Authors

Dasol Sim, Florida International UniversityFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Business Administration

First Advisor's Name

Aya Chacar

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Arun Kumaraswamy

Second Advisor's Committee Title

Committee Member

Third Advisor's Name

Orhun Guldiken

Third Advisor's Committee Title

Committee Member

Fourth Advisor's Name

Nathan Hiller

Fourth Advisor's Committee Title

Committee Member

Fifth Advisor's Name

Stav Fainshmidt

Fifth Advisor's Committee Title

Committee Member

Sixth Advisor's Name

Danielle Combs

Sixth Advisor's Committee Title

Committee Member

Keywords

CFO, CEO, Executive dismissal

Date of Defense

5-30-2023

Abstract

This dissertation argues that chief financial officers (CFOs) may also act as agents of the principal or be responsible for helping achieve shareholders' long-term goals. It examines the validity of this premise in three different settings.

First, the dissertation hypothesizes that CFOs should be held accountable for poor firm performance if they are acting as agents. Consistent with this hypothesis, the dissertation demonstrates that the likelihood of CFO dismissal increases with poor firm performance in S&P 1500 firms. This finding is not a result of scapegoating. Additionally, the study shows that CFO power, which is expected from agents, does not negatively moderate the primary relationship of interest, contrary to predictions from managerial power theory. However, in line with disruption and strategic human capital theories, the likelihood of dismissal following poor firm performance is reduced when the CFO's strategic importance increases.

Second, if CFOs are also acting as agents, it could impact CEO dismissals in two ways. On the one hand, powerful CFOs, in accordance with power circulation theory, can push the CEO out, especially when firm performance is poor. This hypothesis is supported by data on CEO succession in S&P 1500 firms. On the other hand, when CFOs possess high levels of human capital, boards of directors may be less inclined to dismiss the CEO. However, contrary to predictions, CFO expertise is negatively correlated with CEO dismissal, suggesting that expert CFOs help CEOs retain their positions. Moreover, CFO expertise is found to moderate the negative impact of poor firm performance on CEO dismissal, indicating that CEOs with a more expert CFO are more likely to be given the benefit of the doubt in case of underperformance.

Finally, the dissertation argues that CFO succession, if CFOs are acting as agents, will impact the stock market price. The dissertation provides evidence supporting the theory that when CFOs depart and no replacement is announced or only an interim CFO is announced, the stock market reacts negatively. However, this uncertainty dissipates when an internal successor is announced, resulting in a positive market reaction. No significant stock market reaction is observed when the incoming CFO is external. Additionally, the dissertation finds a significant moderating impact of the presence of other internal financial experts on the stock market reaction in interim and external succession, but no significant moderating effect is found in other scenarios.

In conclusion, this dissertation emphasizes the importance of CFOs and the need to study them. It suggests that studies focusing on the C-suite that ignore the CFO may be incomplete or misspecified.

Identifier

FIDC011156

Recommended Citation

Sim, Dasol, "Are CFOs (Chief Financial Officers) Valuable or Powerful?" (2023). FIU Electronic Theses and Dissertations. 5419.
https://digitalcommons.fiu.edu/etd/5419