How Deep is your Bath? Cross-Country Differences in Earnings Management Following CEO Turnovers

46 Pages Posted: 9 Feb 2023 Last revised: 6 Sep 2023

See all articles by Martin Glaum

Martin Glaum

WHU - Otto Beisheim School of Management

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Niklas Meyer

Vrije Universiteit Amsterdam

Date Written: August 22, 2023

Abstract

This study documents that big bath accounting following CEO turnovers is pervasive worldwide and shows that the extent to which CEOs engage in big bath accounting is associated with the degree of discretion they have available in their respective countries. Our analysis is based on a new country-level measure for managerial discretion derived from a questionnaire survey with more than 500 strategy consultants from 35 countries. In addition, we find that newly incoming outsider CEOs and CEOs following non-routine or performance-induced turnovers engage in more earnings management than other incoming CEOs. Lastly, we find that big bath accounting following CEO turnovers is achieved through the management of working capital accruals, provisions, and impairment items. In all of these more detailed analyses, the level of negative discretionary accruals is associated with the discretion available to CEOs in the respective countries. Additional findings reveal no association between legal-based investor protection measures and the extent to which CEOs engage in big bath accounting across countries, presumably because the legal regulations underlying these measures are not relevant in CEO turnover situations and therefore do not constrain newly incoming CEOs. In contrast, our measure is not limited to legal aspects of investor protection but reflects the multidimensionality of managerial decision-making.

Keywords: Managerial Discretion, CEO Turnover, Earnings Management, Discretionary Accruals, Cross-country Differences; Survey-based Measure

Suggested Citation

Glaum, Martin and Landsman, Wayne R. and Meyer, Niklas, How Deep is your Bath? Cross-Country Differences in Earnings Management Following CEO Turnovers (August 22, 2023). Available at SSRN: https://ssrn.com/abstract=4353096 or http://dx.doi.org/10.2139/ssrn.4353096

Martin Glaum

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar
Germany
+49 261 - 6509-315 (Phone)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Niklas Meyer (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV

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