Big Bath Accounting in Managerial Tone Following CEO Turnovers

61 Pages Posted: 24 May 2021 Last revised: 28 Jun 2023

See all articles by Wolfgang Breuer

Wolfgang Breuer

RWTH Aachen University

Marcos Andrés Follonier

affiliation not provided to SSRN

Andreas Knetsch

RWTH Aachen University

Date Written: June 28, 2023

Abstract

This paper sheds light on the open issue as to whether incoming CEOs’ income-reducing accounting decisions misrepresent firm performance and serve the purpose of setting a low benchmark for the incoming CEO’s tenure by blaming her or his predecessor for poor performance. Investigating the textual tone in earnings press releases (EPRs) in the years surrounding CEO turnovers, we find that incoming CEOs use negative tone to an extent that cannot be explained by current firm performance or proxies for expected future performance. We confirm this result for past- or present-oriented language after controlling for tone in forward-oriented EPR statements. This rules out that our results are due to incoming CEOs conveying relevant information about the firm’s future situation that is not contained in financial figures. Moreover, the phenomenon of “big bath rhetoric” is more common to “forced” turnovers, when the incoming CEO is overconfident, or among turnovers, where the incoming CEO takes a big bath by means of discretionary accruals or write-downs. All in all, our results document opportunistic behavior consistent with the hypothesis that incoming CEOs strategically try to bias the perception of market participants about their firm’s situation downwards.

Keywords: CEO turnover, big bath accounting, textual analysis

JEL Classification: G30, M41

Suggested Citation

Breuer, Wolfgang and Follonier, Marcos Andrés and Knetsch, Andreas, Big Bath Accounting in Managerial Tone Following CEO Turnovers (June 28, 2023). Available at SSRN: https://ssrn.com/abstract=3850079 or http://dx.doi.org/10.2139/ssrn.3850079

Wolfgang Breuer

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Marcos Andrés Follonier

affiliation not provided to SSRN

Andreas Knetsch (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

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