Are Humble CEOs Agents? Earnings Management and the Role of Governance Control Mechanism

In this paper, we focus on professional CEOs’ self-interest seeking behaviors and short-termism, which are the main interests in upper echelons theory. Recently, as one of the psychological characteristics of CEOs, humility has received much attention from both scholars and practitioners. Thus, I attempt to find the answer to the question of whether CEO humility can solve problems associated with CEOs’ self-interest seeking behaviors and short-termism. To examine underlying characteristics of humble CEOs, I empirically studied whether humble CEOs are similar to stewards or agents. If humble CEOs are agents, they are likely to cause agency costs and problems. As supported by previous literature, these problems will be limited by different types of internal control mechanism of corporate governance that are found to reduce agency costs. If humble CEOs are stewards, there will be no agency costs and internal control mechanism will be ineffective. In order to find out the answer to this question, I empirically studied the relationship between CEO humility and agency costs associated with self-interest seeking behaviors that are captured by earnings management. In particular, both problems of ‘information asymmetry’ and ‘conflicts of interests’ must be resolved to reduce agency costs. I predict that CEO humility’s four underlying characteristics are effective in resolving the agency costs. Furthermore, I predict that because humble CEOs are similar to steward CEOs, outside directors’ excessive appointment or the increasing proportion of foreign investors will either fail to or negatively moderate the relationship between CEO humility and earnings management. Based on the panel analysis of 210 companies listed in KOSPI, I found out that CEO humility is not significantly related to earnings management. However, the proportion of the foreign investors is found to positively moderate the relationship between CEO humility and earnings management. This means that even