CEO Turnover and Earnings Management in Banks: Evidence Using Age-Based Retirement Policies

43 Pages Posted: 11 Oct 2013 Last revised: 21 Aug 2017

See all articles by Arkodipta Sarkar

Arkodipta Sarkar

Indian School of Business (ISB), Hyderabad

Prasanna L. Tantri

Indian School of Business

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Date Written: December 19, 2013

Abstract

We examine the effect of CEO turnover on earnings management in banks. Since banking is intrinsically an opaque activity, we hypothesize that an incoming CEO of a bank is more likely to manage earnings than a counterpart in a non financial firm. To identify the hypothesized effects, we exploit exogenous variation generated by age-based CEO retirement policies in Indian public sector firms. Compared to banks where there is no turnover, banks experiencing CEO turnover report 23% lower profit-to-sales and 25% lower return-on-assets in the transition quarter. This decrease occurs due to increased provisions, though such provisions do not associate with increased non-performing assets subsequently. Shorter CEO tenure exacerbates earnings management by the incoming CEO. The stock price declines by 1%, and lending is 2% lower than average, which highlight the real effects of earnings management by incoming CEOs. In contrast to banks, we observe no earnings management coinciding with CEO turnover for other public sector firms. As evidence of motivation, we show that earnings management increases likelihood of directorship positions in other firms within two years of retirement.

Keywords: Banks, CEO, CEO turnover, Earnings Management, Financial Crisis, Public Sector Banks, Retirement, Superannuation, Tenure

JEL Classification: G20, G21, G30, M41

Suggested Citation

Sarkar, Arkodipta and Tantri, Prasanna L. and Subramanian, Krishnamurthy, CEO Turnover and Earnings Management in Banks: Evidence Using Age-Based Retirement Policies (December 19, 2013). Indian School of Business WP 2338392, Available at SSRN: https://ssrn.com/abstract=2338392 or http://dx.doi.org/10.2139/ssrn.2338392

Arkodipta Sarkar

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

Krishnamurthy Subramanian (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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