Executive Summary
A lively debate has recently emerged about the positioning and value of business education in general and accounting education in particular: retaining relevance for practice, while maintaining a scientific orientation vis-à-vis other traditional academic disciplines. Leading management scholars have suggested U.S. business schools are failing to impart useful skills to their graduates, sacrificing practical relevance in the interest of academic excellence. Conversely, other scholars note that business schools may have become too market driven, caring more about elusive ratings and failing to ask important questions. Academic evidence illuminating the perceived practical relevance of business education for corporate executives has been sporadic with mixed results.
Not surprisingly, part of this self-reflective debate has specifically focused on accounting education. The professional nature of the accounting discipline has traditionally put accounting graduates under substantial market scrutiny, ultimately placing a heavy burden on the institutions and people that educate accountants. For example, a recent (eventually rejected) National Association of State Boards of Accounting (NASBA) proposal for a uniform accounting curriculum was motivated by “the need for a broader set of transferable skills and content knowledge than in the past” and by “(student applicants) currently choosing courses that may be irrelevant to their ability to perform as CPAs”. Against this backdrop, Demski and Fellingham each conclude that accounting as an academic discipline currently adheres to the needs of accounting employers more than it adheres to its scientific responsibilities as an academic discipline. Given such dichotomy in arguments, it is evident that the relevance of accounting education for practice remains a highly relevant question that has not been sufficiently illuminated by prior research.
A distinct yet related debate has focused on the importance of accounting knowledge, acquired through education or practical experience, for senior decision-makers in particular. This debate has been fuelled by a series of well-publicized financial reporting scandals involving corporate executives, and the ensuing Sarbanes-Oxley Act (SOX) regulation. Early related research studied the link between general financial expertise and decision-making quality for audit committee members. One important issue that emerged from this line of work is whether accounting-specific expertise has a distinct effect on senior financial decision-makers beyond general financial expertise. DeFond, Hann, and Hu contribute to this debate by showing that the market perceives financial expertise differently depending on whether it is accounting-specific. Along these lines, a relevant and interesting issue that has not been addressed by prior work pertains to the separate roles of practical accounting experience and accounting education as determinants of accounting expertise. More specifically, other things being equal, it is a priori unclear whether formal accounting education enhances a senior decision-maker’s accounting expertise or whether relevant practical experience fully compensates for any lack of relevant education. Clearly, addressing this issue has implications for labor market participants such as corporate hiring bodies and financial executives, as well as policymakers. Currently, there is no direct empirical evidence on the incremental importance of accounting education in determining the level of accounting expertise for senior financial decision-makers.
In this study, I draw from the preceding discussions on the practical value of accounting education in general and the relevance of accounting expertise for senior decision-makers in particular, attempting to provide empirical evidence illuminating these issues. To this end, I empirically examine whether accounting education is valued by the stock market. To address this question, I focus on how the market reacts to the appointment of corporate executives with a variety of accounting education profiles. In order to bring the value of accounting education into focus I study the value-relevance of the educational background of corporate controllers who are directly responsible for the accounting function and who typically have no other major responsibilities that would require alternative educational skills. More than other executives, controllers need to have a well-specified set of accounting skills and an intuitive understanding of accounting issues. My basic expectation is that, other things being equal, the stock market’s assessment of corporate controller appointments varies with the appointees’ educational profile. The study’s first hypothesis states that the appointment of a corporate controller holding a formal accounting degree elicits a more favorable market response compared with the appointment of a controller without an accounting degree. The second hypothesis states that, among accounting graduates, appointees holding a degree from a select accounting program elicit a more favorable market response compared with the rest.
Empirically, I use a comprehensive sample of 616 announcements of corporate controller appointments in the United States between 1993–2005 and study whether the market reaction is systematically related to the educational characteristics of the appointees. The event-study method used here provides a nice setting for testing the effects of accounting education because it offers a relatively clean measure of the net benefits of accounting education as perceived by market participants. The results are consistent with expectations for the full sample of firms. Further analysis reveals that these results stem mainly from the appointment of outsiders to the controller’s position. The paper also provides evidence that the passage of SOX has heightened the importance of the controller’s position: following SOX, more appointees hold senior executive titles and accounting degrees, while the average appointee is likely to have more practical accounting experience, both in the industry and in the auditing profession. The paper’s results are robust to a series of sensitivity checks.
The present study contributes to the literature by being the first to examine whether the market reaction to the appointment of an accounting controller depends on whether the appointee has (does not have) an accounting degree (of high quality). By doing so, the study contributes to extant literature in three specific ways. First, in the backdrop of an ongoing debate on the practical value of accounting education, it provides evidence that investors make decisions that consider accounting education credentials, consistent with the existence of positive value in accounting education. This study extends prior work that has focused on the labor market effects of education for accountants in non-executive positions by being the first to focus on degree content at both the undergraduate and graduate levels and on accounting degree quality and to study stock market effects.
Second, this study furthers our understanding of accounting expertise for senior financial decision-makers by isolating the value-relevance of accounting education as a component of their accounting expertise. This study shows that both the presence of accounting education and its quality matter for accounting executives by identifying a difference in the market reaction among corporate controllers depending on the quality of the university program from which they have graduated. Third, this study contributes to the rapidly growing stream of academic research linking individual financial decision-makers to corporate accounting practices by being the first to focus exclusively on corporate controllers. Interest in the role of financial executives was heightened by SOX, which emphasized the importance of corporate governance and increased the salience of the corporate accounting infrastructure. SOX provided the motivation for examining many of the components of the accounting infrastructure such as auditors, audit committees members, the system of internal controls, and CFOs. By highlighting the value-relevance of the controller’s position, the present study adds a useful link to the SOX-related literature studying the importance of the various accounting infrastructure components.
