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

See all articles by Jiang Cheng

Jiang Cheng

Lingnan University

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Tzuting Lin

National Taiwan University - Department of Finance

Date Written: August 7, 2018

Abstract

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

Cheng, Jiang and Cummins, J. David and Lin, Tzuting, Earnings Management Surrounding Forced CEO Turnover: Evidence from the U.S. Property-Casualty Insurance Industry (August 7, 2018). Fox School of Business Research Paper No. 18-052, Available at SSRN: https://ssrn.com/abstract=3228744 or http://dx.doi.org/10.2139/ssrn.3228744

Jiang Cheng

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Tzuting Lin

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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