Interactive Reporting Bias Surrounding CEO Turnover

Posted: 22 Oct 2012 Last revised: 17 Jul 2017

See all articles by Chia-Feng (Jeffrey) Yu

Chia-Feng (Jeffrey) Yu

University of Adelaide - Business School; Financial Research Network (FIRN)

Date Written: January 12, 2016

Abstract

This paper analyzes how CEO turnover affects successive CEOs' financial reporting decisions and the capital market price. I show that when an outgoing CEO (O) in period 1 is succeeded by an incoming CEO (N) in period 2, strategic interaction between O and N leads to interlinked earnings reports. Specifically, when the level of earnings reported by O is lower, N's reporting strategy is more likely to feature a downward reporting bias. Furthermore, by a comparison of the two-CEO setting with a setting with no CEO turnover, I show that with CEO turnover, (i) the period 2 earnings report is more sensitive to the private information of the CEO in control and less sensitive to the period 1 earnings report; (ii) the period 1 earnings report is more sensitive to the private information of the CEO in control; and (iii) the equilibrium stock price has the same sensitivities towards the associated risks, but is less sensitive to the periods 1 and 2 earnings reports. These results provide a novel explanation for managerial under-reporting bias based on strategic interaction between successive CEOs and shed light on the role of CEO turnover in earnings management behavior and capital market responses.

Keywords: CEO Turnover, Earnings Management, Executive Compensation, Capital Market

JEL Classification: D82, D84, G32, M41

Suggested Citation

Yu, Chia-Feng (Jeffrey), Interactive Reporting Bias Surrounding CEO Turnover (January 12, 2016). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2165123 or http://dx.doi.org/10.2139/ssrn.2165123

Chia-Feng (Jeffrey) Yu (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, SA 5005
Australia
+61-08-83132073 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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