Understanding the Role of Industry, Firm, CEO, and CFO Effects in Financial Reporting Quality : A Hierarchical Linear Modelling Approach

Industry, firm, CEO, CFO, and time effects are likely to have a significant influence on a firm’s financial reporting quality (FRQ). However, our understanding of the extent to which each of these factors affects different facets of FRQ remains limited. In this paper, we employ hierarchical linear multi-level modelling (HLM) techniques to quantify the relative influence of industry, firm, manager (CEO and CFO), and year factors on FRQ attributes of accruals quality, financial-statement readability, comparability, and disclosure disaggregation. Our findings suggest that, on average, industry and firm-level effects have the largest impact on FRQ. CEO and CFO effects too are quite considerable. We also find that the CFO (CEO) is the comparatively more influential senior manager in shaping FRQ in terms of accounting numbers (narrative disclosure). In most cases, the five factors of industry, firm, CEO, CFO, and year explain over 70% of the variation in FRQ. The paper contributes to the literature by expanding our understanding on the extent to which characteristics that are inherent to the firm as well as those that vary by managers influence FRQ