Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers
47 Pages Posted: 11 Dec 2017
Date Written: November 9, 2017
We study the effects of accounting losses on CEO turnover. If accounting losses provide incremental information about managerial ability, boards can utilize the information in losses to assess CEO’s stewardship of assets, which is why losses may serve as a heuristic for managerial failure. We find a positive relation between losses and subsequent CEO turnover after controlling for other accounting and stock performance measures. We also find that losses are associated with an increase in board activity and that losses predict poor operating performance and future financial problems. Our results explain why CEOs manage earnings to avoid losses.
Keywords: Accounting losses; CEO turnover
JEL Classification: G30
Suggested Citation: Suggested Citation