Earnings Management Surrounding CEO Changes

25 Pages Posted: 8 Jan 2003

See all articles by Peter Alfred Wells

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ; Financial Research Network (FIRN)

Abstract

This paper investigates the extent of earnings management in the periods surrounding CEO changes by Australian firms. Evidence is presented of incoming CEOs undertaking earnings management to reduce income in the year of CEO change, with abnormal and extraordinary items being the primary vehicle through which this is achieved. This result is consistent with the notion of new CEOs engaging in an 'earnings bath', and is strongest for non-routine CEO changes, where the opportunities to manage earnings are greatest. Extending prior work, classification of CEO changes as routine or non-routine is based on an expanded information search, and this provides insights into the CEO change process and identifies problems with simpler mechanistic classification methods. Additionally, detailed information of the operation of the modified Jones model for estimating expected accruals is presented, and this is consistent with such models having low explanatory power in identifying abnormal accruals.

Keywords: earnings management, management compensation; CEO change processes

JEL Classification: M41, M43, M48, J33, G34

Suggested Citation

Wells, Peter Alfred, Earnings Management Surrounding CEO Changes. Available at SSRN: https://ssrn.com/abstract=320419

Peter Alfred Wells (Contact Author)

University of Technology Sydney, Accounting Discipline Group ( email )

P.O. Box 123
Broadway NSW 2007
Australia
+61 (02) 9514 3628 / 3629 (Phone)
+61 (02) 9514 5515 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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