The Association Between Executive Succession and Discretionary Accounting Changes: Earnings Management or Different Perspectives?

Abstract

This paper investigates the association of executive changes with both income increasing and decreasing accounting changes. Two potential explanations for the hypothesis that firms with changes in CEOs are more likely to make accounting changes are examined. The earnings management explanation holds that new management intervenes in the financial reporting process in order to alter perceptions of effectiveness. The different perspectives explanation holds that managements have different tastes, perspectives, or views of the world than the predecessor. Evidence supports the different perspectives explanation.

Changes in corporate management: do they have an impact on share prices and company earnings?

“…The findings of this research indicate that an association may exist between (a) top executive changes and (b) the choices of discretionary accounting policies made by these executives and also Volume 26 Number 9 2000 67 between executive changes and (c) the inclusion of large writedowns in the financial accounts. For example, La Salle, Jones and Jain (1993) report that US firms which changed their CEO were nearly twice as likely to alter their accounting policies as firms which avoided such changes; " a practice which they attribute to "different perspectives among CEOs" rather than, as is often alleged, a desire of new CEOs to create the illusion of rapid earnings growth by adopting income-decreasing accounting procedures early in their period in office. Also, Strong and Meyer (1987) find that "the most important determinant of a writedown decision is a change in senior management" (p. 659), particularly if the new chief executive is appointed from outside the company.…”

The New CEO and the Post‐succession Process: An Integration of Past Research and Future Directions

“…An exception within this line of research is an early study by Lasalle et al (1993), who did not find evidence that new CEOs manipulated earnings, although they did tend to adjust financial measures. In sum, these studies suggest that CEOs have some discretion in adjusting financial measures and sometimes use it to establish a record of success early on.…”

“…In sum, these studies suggest that CEOs have some discretion in adjusting financial measures and sometimes use it to establish a record of success early on. An exception within this line of research is an early study by Lasalle et al (1993), who did not find evidence that new CEOs manipulated earnings, although they did tend to adjust financial measures.…”

“…Krieger and Ang 2013 Under higher pressure to improve performance, new CEOs are more likely to manipulate earnings. Lasalle et al 1993 No evidence was found that new CEOs engage in earnings management. Pourciau 1993 New CEOs often deflate earnings in the year of transition and inflate earnings in the following year.…”

Corporate Governance and Book-Tax Differences: Tunisian Evidence

“…Prior studies provide evidence that firm managers run their earnings to avoid the announcement of bad information such as weak performance and loss of income (Pourciau, 1993;Geiger & North, 2011;Lasalle et al, 1993;Shabou & Boulila 2002;Jeanjean, 2001;Gupta, 1995;Bowen et al, 2008) or to smooth earnings (Stolowy & Breton, 2003;Nejad et al, 2013, Cheng & Li, 2014. Some studies attribute earnings manipulations to fiscal purposes (Aboub & Ben Amar, 2008;Breton & Schatt, 2003).…”