Earnings management surrounding CEO changes

Wells, Peter

doi:10.1111/1467-629x.00073

Cited by 126 publications

(174 citation statements)

References 16 publications

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“…As we are unable to identify executives who only very narrowly evaded replacement only, discretion exerted by the incumbent is once more hard to detect. Both reasons may explain why previous studies (e. g. Wells (2002), Davidson III et al (2007)) find only limited evidence of discretion exerted by the departing CEO during the turnover year.…”

Section: Hypothesesmentioning

confidence: 91%

“…The literature (e. g. Pourciau (1993), Wells (2002)) investigates differences in the way managerial discretion is exerted during so-called routine CEO changes on the one hand and non-routine ones on the other. Whereas a routine turnover is characterized by a relatively orderly CEO succession process, a bank may not have the opportunity to adequately structure a non-routine turnover.…”

Section: Hypothesesmentioning

confidence: 99%

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Earnings Baths by Bank CEOs During Turnovers

Bornemann¹,

Pfingsten

Kick

et al. 2014

SSRN Journal

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Reproduction permitted only if source is stated. Non-technical summaryThe chief executive officer (CEO) occupies an accentuated position in a firm's decisionmaking process. In this empirical study we investigate whether incoming CEOs in German banks engage in big bath accounting during their first year in charge. Taking such an earnings bath lowers the performance benchmark to be achieved in subsequent years. As a poor performance in the first year is often not yet attributed to the managerial skills of the incoming CEO, doing so does not entail any drawbacks with respect to his or her remuneration or reputation.Our findings from a sample of German savings banks over 1993-2012 are as follows.We document that incoming CEOs increase discretionary expenses during their first year in charge. Succeeding CEOs from outside the bank take a larger earnings bath than those from the inside, and incoming CEOs take a smaller earnings bath when the incumbent CEOs retire than when they leave for other reasons. These findings are insensitive to several modifications. Most importantly, the results hold even when we focus on banks that do not need to cure shortages in their existing stock of risk provisions, which may provide an alternative explanation for observable extraordinary amounts of discretionary expenses.This study is -to the best of our knowledge -the first to report on big bath accounting during CEO turnovers in the banking industry. It contributes to a better understanding of corporate governance in financial institutions and, for stakeholders, it helps to more correctly evaluate bank performance during turnover years. Nicht-technische Zusammenfassung University of Lueneburg AbstractThis study investigates the development of income-decreasing discretionary expenses surrounding CEO turnovers at banks. We expect incoming CEOs to take an earnings bath during the initial stage of their tenure. For a sample of German banks over the period 1993-2012, we document that (1) incoming CEOs increase discretionary expenses, i. e. engage in big bath accounting, during their first (partial) year in charge, (2) incoming CEOs from outside the bank take a larger earnings bath than insiders, and (3) incoming CEOs take a smaller earnings bath when the incumbent CEOs retire than when they leave for other reasons. Our findings are robust to several modifications. Most importantly, they also hold true when the incoming CEO's objective of rectifying shortages in the existing stock of risk provisions has been taken into account, which may provide an alternative explanation for observing extraordinary amounts of discretionary expenses in turnover years.

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Section: Hypothesesmentioning

confidence: 91%

Section: Hypothesesmentioning

confidence: 99%

Earnings Baths by Bank CEOs During Turnovers

Bornemann¹,

Pfingsten

Kick

et al. 2014

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…Previous studies (Wilson & Wang, 2010;Conyon & Florou, 2004;Reitenga & Tearney, 2003;Godfrey, Mather, & Ramsay 2003;Wells, 2002;Brickley, Linck, & Coles, 1999;Pourciau, 1993;Dechow & Sloan, 1991) have indicated that CEO turnover is commonly related to earnings quality. Thus, we included a factor for CEO turnover in a reexamination of our third hypothesis, the results of which are listed in Table 9.…”

Section: Consider the Ceo Turnovermentioning

confidence: 98%

Exploring the Nature of Material Information: Disclosure and Its Implications

Wang¹,

Syu²

2015

IJEF

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Understanding the nature of material information is of crucial importance to regulators and the investment community, particularly with regard to the implications of disclosure. This study examined the disclosure of material information by companies listed in Taiwan in various stages of their life cycle to identify the nature of material information as well as related firm performance and provides insights into their causes and consequences. Evidence suggests that companies intent on fulfilling their corporate social responsibilities are more likely to disclose material information and when doing so, they are highly valued by market participants. Our empirical results provide strong evidence that the disclosure of material information by socially responsible companies is associated with higher earnings quality. Furthermore, mature companies are more likely than growing companies to receive favorable reactions from market participants when they disclose material information.

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“…Earlier literature reported a positive association between the tenure of CEO and earnings management behaviors, as measured by discretionary accruals (Wells, 2002;Goodfrey, 2003) and assets write-offs (Strong & Meyer, 1987;Elliott & Show, 1988). More recently, researches have investigated the relation between CEO change and goodwill write-offs, in the transition period (Beatty & Weber, 2006;Zang, 2008;Lapointe-Antunes et al, 2008) and in the post-adoption period (Guler, 2006;Masters-Stout et al, 2008;Stumpell, 2012;Ramanna & Watts, 2012;Al Dabbous et al, 2015) and have proved that new managers tend to use the discretion afforded by the goodwill impairment process under IAS 36, in order to reduce earnings.…”

Section: Change In Senior Managementmentioning

confidence: 99%

Determinants of Goodwill Impairment Losses under IAS 36: The French Case

Hassine

Jilani

2017

ijafr

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The present paper investigates the determinants of goodwill impairment losses under IAS 36. More specifically, this study examines the impact of earnings management, corporate governance and financial crisis on goodwill impairment losses reported by French firms following the adoption of IAS 36 on purchased goodwill. Based on a sample of 730 observations from 107 groups of companies that belong to the SBF 250 over the period 2006-2012, the findings of this research confirm largely our predictions. Indeed, main results show that managers impair goodwill to meet earnings management motives linked to CEO change, earnings smoothing, big bath accounting and financial crisis. Moreover, they reveal that French firms impair goodwill to respond to debt renegotiation hypothesis. In addition, the findings demonstrate that French firms audited by a Big Four auditor record lower goodwill impairment losses. Thus, they highlight the role of audit quality to constrain managerial opportunism associated to goodwill impairment. This study illuminates the accounting standard-setters in understanding the determinants of goodwill impairment losses in France under IAS 36. Therefore, it contributes to the international actual debate on goodwill and to the international accounting literature.

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Earnings management surrounding CEO changes

Cited by 126 publications

References 16 publications

Earnings Baths by Bank CEOs During Turnovers

Earnings Baths by Bank CEOs During Turnovers

Exploring the Nature of Material Information: Disclosure and Its Implications

Determinants of Goodwill Impairment Losses under IAS 36: The French Case

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