Birds of a feather flock together: How and when does the fit of CEO–CFO high promotion focus predict new venture initial public offering fraud?

• Published date: 01 May 2024
• Author: Mijia Gong,Zhe Zhang,Xiaohua Yang,Ming Jia
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/corg.12536

ORIGINAL ARTICLE

Birds of a feather flock together: How and when does the fit of

CEO–CFO high promotion focus predict new venture initial

public offering fraud?

Mijia Gong

1

| Zhe Zhang

2

| Xiaohua Yang

3

| Ming Jia

1

1

School of Management, Northwestern

Polytechnical University, Xi'an, China

2

School of Management, Xi'an Jiaotong

University, Xi'an, China

3

School of Management, University of San

Francisco, San Francisco, California, USA

Correspondence

Zhe Zhang, School of Management, Xi'an

Jiaotong University, Xi'an, China.

Email: zhangzhe220@sina.com

Funding information

National Natural Science Foundation of China,

Grant/Award Number: 72172119; Foundation

of Humanities and Social Sciences sponsored

by Chinese Ministry of Education,

Grant/Award Number: 21XJA630010; Science

Fund for Distinguished Young Scholars from

Shaanxi Province, Grant/Award Number:

2022JC-51; The Fundamental Research Funds

for the Central Universities, Grant/Award

Number: D5000230177

Abstract

Research Question/Issue: This study attempts to examine how the fit of CEO and

CFO high promotion focus, an important motivational-based psychological trait, can

affect new venture initial public offering (IPO) fraud. Furthermore, we explore how

this relationship is moderated by CEO–CFO status similarity (firm internal environ-

ment) and environmental dynamism (firm external environment).

Research Findings/Insights: Using a sample of Chinese new ventures listed on

growth enterprise market from 2010 to 2016, we conduct computer-aided content

analysis to quantify CEO and CFO promotion focus. Results show that the fit of

CEO–CFO high promotion focus increases the likelihood of new venture IPO fraud.

Moreover, CEO–CFO status similarity and environmental dynamism strengthen this

positive relationship.

Theoretical/Academic Implications: We make three main contributions to the litera-

ture. First, we enrich upper echelons literature on CEO–top management team (TMT)

interface by exploring how the psychological characteristic (promotion focus) of

CEO–CFO dyad, a subteam of TMT, affects new venture IPO fraud. Second, we con-

tribute to regulatory focus theory by extending interpersonal promotion fit to the

context of upper echelons level and exploring its boundary conditions of CEO–CFO

status similarity (internal environment) and environmental dynamism (external envi-

ronment). Third, from the perspective of microfoundation, this study contributes to

IPO fraud literature by investigating the antecedents of firm internal factors, specifi-

cally the psychological trait—high promotion focus fit of CEO–CFO.

Practitioner/Policy Implications: By examining the fit of CEO and CFO high promo-

tion focus, this study shows the need to consider the motivational-based psychologi-

cal traits of CEO and CFO when selecting, training, monitoring, dismissing, and

compensating executives. Moreover, to prevent new venture IPO fraud, policy-

makers and key stakeholders such as the board of directors can consider paying

much attention to firms with CEO and CFO who possess high promotion focus.

KEYWORDS

corporate governance, CEO–CFO dyad, IPO fraud, new venture, regulatory focus, status

similarity

Received: 1 November 2020 Revised: 2 May 2023 Accepted: 3 May 2023

DOI: 10.1111/corg.12536

408 © 2023 John Wiley & Sons Ltd. Corp Govern Int Rev. 2024;32:408–427.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

“It is our aggressive growth that leads to such fraud.

1

”

China Securities Regulatory Commission banned Leshi

Internet CEO Yueting Jia and CFO Lijie Yang from the

securities market for life because of IPO fraud.

2

(Yueting Jia, CEO of Leshi Internet)

Corporate governance research emphasizes the necessity to shift

insights from large established firms to new ventures during initial

public offering (IPO) (Dawson et al., 2021; Garg, 2020;

Talaulicar, 2020). The latter are subject to relatively weak scrutiny

and, thus, have high probability to commit fraud (Tian et al., 2016).

For example, the Leshi Internet and Luckin Coffee IPO fraud manipu-

lated by certain executives arouse global concerns from media and

scholars. IPO fraud refers to new ventures' behaviors judged by a

social-control agent to cross a line separating right from wrong during

IPO (Greve et al., 2010). Typical fraud behaviors during IPO include

misreporting, illegal, false records, misleading statements, major omis-

sion, improper use of funds, and illegal stock trading, among others

(Gong et al., 2020; Shi et al., 2020). Although fraud may bring benefits

(e.g., passing IPO successfully and quickly), firms face high risks of

costs such as delisting if detected. Why do some new ventures yield

these benefits and ignore costs to engage in IPO fraud?

Early studies base on upper echelons theory (Hambrick &

Mason, 1984) to investigate how CEO's observabletraits such as facial

expressions (Gong et al., 2021) and personal bonds (Jiang et al., 2018)

affect new venture fraud. However, the role of the top management

team (TMT) remains unclear. Exploring this question is important

because, in new ventures,CEO is not a “lone ranger”who makes deci-

sions single-handedly but rather isnested in a team of other executives

(Talaulicar, 2020).CEOs ask for advice from other executives more fre-

quently in new ventures than in large firms, in which executives may

have little “teamness”(Talaulicar et al., 2005).More importantly, not all

executives are highly involved in the decision-making process (Shi

et al., 2019). Thus, upper echelons theory emphasizes the importance

to “identify the subgroups who are primarily responsible for certain

types of decision and then to use just their characteristics to predict

actions”(Hambrick,2007, p. 336). Particularly, IPO fraud requirescoor-

dination, support,or acquiescence between CEOsand other executives

especially CFOs, the “second-in-command”in firms (Albrecht

et al., 2015; Khanna et al.,2015). CFOs assist CEOs by preparingfinan-

cial reports for IPO and selling IPO stories to investors (Brau &

Fawcett, 2006). Through interactions,they may feel more motivated or

discouraged (Righetti et al., 2011). Unfortunately, limited attention is

paid to the effect of CEO–CFOdyad on new venture IPO fraud.

In this study, we focus on new ventures and explore how IPO

fraud can be impacted by the fit of CEO and CFO high promotion

focus, a psychological characteristic that can further open the black

box between demographic characteristics and firm behaviors

(Hambrick, 2007). Specifically, matched psychological characteristicsof

CEO and CFO lay the foundationof collaboration to facilitate effective

management for firms (Hsieh et al., 2018), and particularly, motivation

plays a key role in impacting fraud decisions (Baron et al., 2018). As a

comprehensive motivation theory, regulatory focus theory

(Higgins, 1997,1998) posits that individuals self-regulate behaviors

toward goals of growth or security either through promotion focus or

prevention focus. When an individual's regulatory focus is congruent

with their partners, interpersonal regulatory fit (e.g., CEOs and CFOs

are both in high promotion focus) occurs (Righetti et al., 2011; Shin

et al., 2017). Notably,promotion focus is a typical trait of entrepreneurs

because they tend topursue growth and idealized selves on the entre-

preneurial road, which is full of creativity and uncertainty and low on

security (Kark & Dijk, 2019). Theoretical and empirical evidence indi-

cates that CEOs in new ventures are usually in high promotion focus

(Bryant, 2009;Foo et al., 2016; Kark & Dijk, 2019). Compared with pre-

vention focus, promotion focus is more likely to lead individuals to

enjoy benefits from interpersonal regulatory fit (Righetti et al., 2011).

Considering that we are studying executives in new ventures, the cur-

rent research only considers promotionfit owing to the preceding rea-

sons.

3

Recently, scholars suggest that executives with high promotion

focus in new venturesmay engage in fraud because they seek to attain

success by any means and can easilyexperience promotion fit, thereby

increasing motivations accordingly (Baron et al., 2018;Righetti

et al., 2011). However, no research explores this relationship empiri-

cally. Nearly all current studies on promotion fit focus on leader–

employee dyad to predict work-relatedbehaviors and ignore the upper

echelons level (e.g.,CEO–CFO dyad) (Kark & Dijk, 2019). This omission

is unfortunate because promotion fit plays a key role in interpersonal

relationships and interactions, which can affect executives' decision-

making process (Johnson et al., 2017). Thus, scholars call for research

to explore this question (Higgins & Pinelli, 2020; Johnson et al., 2015).

Thus, the fit of CEO–CFO high promotion focus may have great poten-

tial to predict IPO fraudin new ventures.

To unpack the relationship between CEO–CFO promotion fit and

new venture IPOfraud, we integrate upper echelonstheory and regula-

tory focus theory into our work. Upper echelons theory

(Hambrick, 2007)posits that the psychological characteristics of execu-

tives considerably affect firm behaviors; however, it does not explain

the specific functional mechanisms. Meanwhile,regulatory focus theory

(Higgins, 1997,1998)is complementary and explains “why”and “how”

individuals with high promotion focus chase growth using risky tactics

and eagerness strategies and may even cross ethical boundaries when

faced with the opportunity of fraud (Baron et al., 2018; Bryant, 2009;

Gino & Margolis, 2011). Furthermore, when promotion fit occurs, indi-

viduals' interactions and motivations to achieve goals increase accord-

ingly (Righetti et al., 2011). By integrating these two theories, we

theorize that compared with low promotion-focused CEOs, high

promotion-focused CEOs' preferences for risk-taking and eagerness

behaviors may lead them to engage in IPO fraud, a typical risky and

eager problem-solving behavior (Baron et al., 2018; Gino & Margolis,

2011;Gongetal.,2021; Xu et al., 2019). Furthermore, when the high

promotion focus of CEO and CFO fits, their interactions increase,

amplifying motivations to engage in IPO fraudin new ventures.

Regulatory focus theory (Higgins, 1997,1998) also suggests that

the effect of promotion fit on firm behaviors is potentially influenced

GONG ET AL.409