Big Bath Accounting and CEO Overconfidence

46 Pages Posted: 5 Apr 2013 Last revised: 15 Dec 2014

See all articles by Valentin Burg

Valentin Burg

Humboldt University

Jochen Pierk

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Tobias Scheinert

Humboldt University

Date Written: November 26, 2014

Abstract

This paper empirically investigates the relationship between managerial overconfidence and write-offs following CEO turnover. Subsequent to managerial turnover, it is often observed that large one-time charges are used to decrease current earnings for the benefit of higher future earnings. This earnings management technique, commonly referred to as big bath accounting, facilitates the meeting of given future earnings targets. Overconfident managers overestimate their abilities and consequently have upwardly biased expectations concerning future firm performance. Based on this premise, we hypothesize that overconfident CEOs see less need to engage in an earnings bath following managerial change in order to boost future earnings. Our empirical results confirm this hypothesis showing that earnings baths at CEO turnover are significantly more frequent only among non-overconfident CEOs.

Keywords: Big bath accounting, earnings management, managerial characteristics, overconfidence

JEL Classification: M40, M41, G30

Suggested Citation

Burg, Valentin and Pierk, Jochen and Scheinert, Tobias, Big Bath Accounting and CEO Overconfidence (November 26, 2014). Available at SSRN: https://ssrn.com/abstract=2244870 or http://dx.doi.org/10.2139/ssrn.2244870

Valentin Burg

Humboldt University ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Jochen Pierk (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tobias Scheinert

Humboldt University ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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