Earnings Management Surrounding Forced CEO Turnover: Evidence from the U.S. Property-Casualty Insurance Industry
42 Pages Posted: 21 Aug 2018 Last revised: 23 Jan 2019
Date Written: August 7, 2018
In this paper, we investigate earnings management surrounding forced CEO turnover for U.S. property-casualty insurance companies with differing organizational forms. We analyze the three principal organizational form types in the industry – publicly-traded stocks, closely-held stocks, and mutuals. We utilize a unique measure of earnings management, the loss reserve error. Multivariate results show that all ownership types over-state earnings during our sample period whether or not forced turnover occurs. Over-statement is highest for publicly-traded stocks, followed by closely-held stocks and mutuals. Organizational form matters in constraining managerial opportunism in the presence of forced turnovers. Incumbent CEOs of publicly-traded stocks manage earnings upward prior to forced turnovers, consistent with the cover-up hypothesis, but this hypothesis is not consistently supported for mutuals or closely-held stocks. The univariate results support the big-bath hypothesis for closely-held stocks, but the multivariate results do not support the big-bath hypothesis for any organizational form. Finally, corporate governance matters – high board independence and large board sizes are associated with less income over-statement.
Keywords: CEO Turnover, Earnings Management, Reserve Error, Ownership Structure, Property-Casualty Insurance
JEL Classification: M41, G22, G34
Suggested Citation: Suggested Citation