Earnings and Impression Management in Financial Reports: The Case of CEO Changes

Monash Dept. of Acctg. & Finance Working Paper No. 68

41 Pages Posted: 13 Dec 2000

See all articles by Jayne M. Godfrey

Jayne M. Godfrey

University of Auckland

Paul R. Mather

La Trobe University

Alan L. Ramsay

Monash University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

Abstract

This paper examines earnings management, as well as the presentational format of graphs (impression management) in the financial reports of Australian listed public companies changing chief executive officers (CEOs). Prior US evidence suggests downward earnings management in the year of senior management changes and upward management in the following year (see Pourciau, 1993). We argue that new managers not only have incentives to manage earnings but also have similar incentives to engage in impression management by manipulating the impressions created by graphs in financial reports. Examining both earnings and impression management simultaneously facilitates the possibility of distinguishing between between management opportunism and attempts to reflect underlying economic performance as explanations for any observed earnings management.

In the year of CEO change, we hypothesise and find evidence of downward earnings management but no evidence of any unfavourable impression management of the key financial variables (KFVs) graphed. As posited, we find evidence of upward earnings management and favourable impression management in the year after a CEO change. These results are strongest for the sub-sample where the CEO change was due to a resignation rather than a retirement.

To our knowledge, this is the first study to link the earnings and impression management literature and is also the first study to examine impression management in the context of CEO change. Accordingly, it contributes to the literature exploring context-specific incentives for earnings management, impression management and the role of accounting in corporate contracting.

Keywords: CEO change; Earnings management; Impression management; Big bath

JEL Classification: M41, M43, G34

Suggested Citation

Godfrey, Jayne M. and Mather, Paul R. and Ramsay, Alan, Earnings and Impression Management in Financial Reports: The Case of CEO Changes (October 2000). Monash Dept. of Acctg. & Finance Working Paper No. 68. Available at SSRN: https://ssrn.com/abstract=248183 or http://dx.doi.org/10.2139/ssrn.248183

Jayne M. Godfrey

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Paul R. Mather (Contact Author)

La Trobe University ( email )

School of Accounting
Bundoora
Melbourne, Victoria 3086
Australia
+61-3-9479-5264 (Phone)

Alan Ramsay

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
1,412
Abstract Views
5,229
rank
12,256
PlumX Metrics