New Chief Executive Officers Earnings Forecasts Bias At Their First Year Term And Role Of Financial Analysts: Korean Evidence

Abstract

This study investigates newly appointed Chief Executive Officers (CEOs) earnings forecasts bias at their first year term using listed firm data in Korea. Prior literature reports that new CEOs prefer to report low earnings (big bath or cookie jar accounting) at their first year term for the purpose of income smoothing. However, it is hard to find the studies about new CEOs earnings forecasts bias at the term of low earnings reporting incentive. We question what earnings forecasts bias they usually have when they are interested in low earnings reporting.From the empirical tests, we find that newly appointed CEOs tend to provide conservative (negative) forecasts instead of optimistic (positive) forecasts at their first term. Furthermore, we find that greater analyst following helps to relieve the negatively biased earnings forecasts of new CEOs.This study will contribute to academics and disclosure-related practitioners by documenting about newly appointed CEOs earnings forecasts bias. We also believe that our empirical evidence will be helpful to market participants when they make a business decisions in case of CEO turnover.

Pengaruh Komite Audit dan CEO Tenure Terhadap Kualitas Laporan Keuangan

“…Salah satu cara yang dilakukan adalah melakukan peramalan atas laba guna memberi sinyal bahwa mereka mampu memperkirakan perubahan ekonomik yang mendasari perusahaan. Sinyal yang diberikan oleh CEO baru meliputi peramalan laba yang optismistic yang memenuhi ekpektasi pasar sehingga CEO baru dapat menunjukkan kemampuan mereka dalam mengelola perusahaan (Rhee et al, 2015). Berdasarkan kajian hasil penelitian di atas, maka dapat dirumuskan hipotesis sebagi berikut: H2: Masa jabatan CEO berpengaruh terhadap manajemen laba…”

“…Hal ini mengindikasi masa jabatan CEO berpengaruh terhadap praktik manajemen laba riil. Menurut Rhee et al (2015) CEO yang baru menjabat melakukan manajemen laba untuk menjawab ekspektasi pasar yang melekat kepadanya. Selain itu kekhwatiran atas reputasi dan karir CEO juga mendasari CEO yang baru menjabat melakukan manajemen laba (Xie, 2015).…”

The Effect Of IFRS Adoption On Likelihood Of Management Earnings Forecasts: Evidence In Korea

“…We use control variables of management earnings forecasts determinants. To control the demand of investors for corporate transparency and firms size, we include total number of analysts' following (ANALY) and natural log of total assets (SIZE) (Rhee and Moon, 2015;Lang and Lundholm, 1993;Kasznik and Lev, 1995). The logarithmic value of market to book ratio (MB) is a control variable for the firm's growth opportunity set (Bamber & Cheon, 1998).…”

The Effect Of Chief Executive Officers Turnover On International Financial Reporting Standards Reconciliation

“…The result supports the argument that newly appointed CEOs tend to report lower earnings at the first year term. Rhee and Moon (2015) study the newly appointed CEOs' earnings forecasts bias at the first year term. They report that newly appointed CEOs tend to provide more conservative earnings forecasts than optimistic earnings forecasts at the term and explain that new CEOs are able to meet or beat their earnings forecasts easily by providing conservative earnings forecasts.…”

“…In this circumstance, the CEOs are more likely to apply their discretionary accounting decisions at the process of IFRS reconciliation. In addition, new CEOs have an incentive to report lower earnings at the appointment year for the purpose of big bath (Moore 1973;Strong and Meyer 1987;Pourciau 1993;Rhee and Moon 2015). If CEO turnover is occurred in 2011, newly appointed CEOs who have an incentive of big bath may use IFRS reconciliation in order to reduce IFRS earnings for 2011.…”