Size counts for CFO signatures, suggests study

Photo courtesy of Sebastien Wiertz on Flickr

Photo courtesy of Sebastien Wiertz on Flickr

Rob Swystun, Pristine Advisers

When it comes to chief financial officers, it turns out size does matter … or it might, anyway. (We’re talking about signature sizes here, obviously.)

A recent research paper suggests that the larger a CFO’s signature appears on US Securities and Exchange Commission documents filed by their companies, the more likely it is that those companies have been doctoring their numbers.

The paper, from researchers at the University of Maryland and the University of North Carolina-Chapel Hill, says there is a link between larger CFO signatures and things like an increased probability of financial restatements and a slower recognition of losses by the companies they work for.

Another finding of the paper, as reported by Jena McGregor for The Washington Post, is that larger signatures may be a sign that a CFO has a big ego.

This isn’t an entirely new area of study, as past research has considered the size of a CEO’s photo in annual reports and the frequency of first person pronouns used by executives in annual reports or how much money CEOs make as an indication of narcissism and its potential impact on company performance.

The problem with looking at those things is that executives generally don’t control the design of the annual report or the copy that goes into it (including the words attributed to them).

Because of this, and because financial statements are usually managed by the CFO, University of Maryland assistant professor Nick Seybert and his co-authors chose to look at signature size to study how ego could affect the quality of corporate accounting.

How they did it

Using prior research that had found a link between self-esteem, dominance and signature size, the researchers performed an experimental study where they measured the size of students’ handwriting and then had those students answer a standard personality test for narcissism. They then examined how honest the students were when reporting financial figures to a partner. That lab test showed a link between narcissism, signatures and dishonesty.

The next step for Seybert and his co-authors was to analyze more than 500 CFOs’ signatures from notarized financial documents. They did this by drawing a rectangle around the signature and measuring the area of each letter.

The researchers then compared the signatures with various accounting measures, like evidence of earnings manipulation, the number of financial restatements issued by the company, and how quickly a company recognized past losses.

What they found

The CFOs who “fall very high on signature size often presided over pretty bad accounting,” Seybert said.

The result the team came away with from all this analysis was an overall link between large writing and misrepresentation in financial reporting.

According to Seybert, when controlling for other factors, the likelihood of a financial restatement goes up by about 50% for each square-centimeter increase in the size of the letters in the CFO’s signature. (The letter sizes in the research sample ranged from 1/5 of a square centimeter to just under three square centimeters.)

Obviously, these findings don’t mean every CFO with a sizeable signature is skewing earnings, just as they don’t indicate that little lettering means a CFO is being honest with the numbers, Seybert points out.

Among the 25 CFOs with the highest rate of restatements, 18 have large signatures and seven have small signatures. Among the 25 CFOs with the lowest levels of apparent misreporting, 10 have large signatures and 15 have small signatures.

Those numbers may not seem like a huge difference, but Seybert says they are considered statistically significant. And while he and the rest of the research team admit in the paper that a signature is a “fairly crude proxy,” for signifying egotism, it’s one of the few ways to get an objective measure of a CFO’s ego, as a signature isn’t influenced by a firm’s investor relations department. Plus, they are easily collected from a large number of financial executives, which gives researchers a good sample size.

“Our goal is not to advocate for signature size as an indicator, per se,” the researchers wrote in the paper, “but to provide evidence that narcissism in general is a potentially important attribute in CFO oversight of financial reporting.”

Seybert also wants the research to serve as a reminder that a big ego shouldn’t simply be seen as part of the package that boards are forced to accept in their top finance executives.

“A big takeaway to me is more of a social one,” Seybert says of the research. “I think a lot of people, when you’re talking about these big jobs, think having a big ego is just par for the course — that narcissistic, stronger personalities can be good for company leadership. But there’s these negative aspects, [where they] could pull the wool over investors’ eyes, too.”

So remember; bigger isn’t always better. It’s how you use it that counts. (We’re still talking about signatures, by the way.)


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