Earnings Baths by Bank CEOs During Turnovers

Deutsche Bundesbank Discussion Paper No 05/2014

42 Pages Posted: 19 Jun 2014

See all articles by Sven Bornemann

Sven Bornemann

University of Muenster - Finance Center Muenster

Thomas K. Kick

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Andrea Schertler

Leuphana University of Lueneburg

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2014

Abstract

This study investigates the development of income-decreasing discretionary expenses surrounding CEO turnovers at banks. We expect incoming CEOs to take an earnings bath during the initial stage of their tenure. For a sample of German banks over the period 1993-2012, we document that (1) incoming CEOs increase discretionary expenses, i.e. engage in big bath accounting, during their first (partial) year in charge, (2) incoming CEOs from outside the bank take a larger earnings bath than insiders, and (3) incoming CEOs take a smaller earnings bath when the incumbent CEOs retire than when they leave for other reasons. Our findings are robust to several modifications. Most importantly, they also hold true when the incoming CEO's objective of rectifying shortages in the existing stock of risk provisions has been taken into account, which may provide an alternative explanation for observing extraordinary amounts of discretionary expenses in turnover years.

Keywords: CEO turnover, Earnings management, Big bath accounting, Discretionary expenses, Financial institutions

JEL Classification: C23, G21, M41

Suggested Citation

Bornemann, Sven and Kick, Thomas K. and Pfingsten, Andreas and Schertler, Andrea, Earnings Baths by Bank CEOs During Turnovers (June 18, 2014). Deutsche Bundesbank Discussion Paper No 05/2014, Available at SSRN: https://ssrn.com/abstract=2456228 or http://dx.doi.org/10.2139/ssrn.2456228

Sven Bornemann

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29948 (Phone)
+49 251 83 22882 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm

Thomas K. Kick

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

Andrea Schertler (Contact Author)

Leuphana University of Lueneburg ( email )

Scharnhorststrasse 1
Lüneburg, 21314
Germany

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