Earnings Management Surrounding CEO Turnover: Evidence from Korea

31 Pages Posted: 11 Mar 2014

See all articles by Jong‐Seo Choi

Jong‐Seo Choi

Pusan National University

Young‐Min Kwak

University of Ulsan

Chongwoo Choe

Monash University - Department of Economics

Date Written: March 2014

Abstract

This article examines the empirical relation between chief executive officer (CEO) turnover and earnings management in Korea using a sample of 403 CEO turnovers and 806 non‐turnover control firms during the period 2001–2010. We classify CEO turnovers into four types depending on whether the departure of the outgoing CEO is peaceful or forced and whether the incoming CEO is promoted from within or recruited from outside the firm. We measure earnings management by both discretionary accruals and real activities management. We also control for the endogeneity of CEO turnover and a potential selection bias using 2SLS and Heckman's two‐stage approach. After controlling for corporate financial performance and governance structure, we find upward earnings management by the departing CEO only when the departure is forced and the new CEO is an insider. In this case, the new CEO also engages in downward earnings management using both discretionary accruals and real activities management. We also find some evidence that the new CEO recruited from outside the firm manages discretionary accruals upward following the peaceful departure of his predecessor. In all other types of CEO turnover, we do not find evidence of significant earnings management by either CEO.

Keywords: CEO turnover, Earnings management, Financial performance, Corporate governance, Korea Stock Exchange

Suggested Citation

Choi, Jong‐Seo and Kwak, Young‐Min and Choe, Chongwoo, Earnings Management Surrounding CEO Turnover: Evidence from Korea (March 2014). Abacus, Vol. 50, Issue 1, pp. 25-55, 2014. Available at SSRN: https://ssrn.com/abstract=2407224 or http://dx.doi.org/10.1111/abac.12021

Jong‐Seo Choi (Contact Author)

Pusan National University

mulgeumup beomyeli
Pusan 609-735, 50612
Korea, Republic of (South Korea)

Young‐Min Kwak

University of Ulsan

Ulsan
Korea, Republic of (South Korea)

Chongwoo Choe

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

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