Open AccessCEO Succession, Investor Expectations, and Real Earnings Management
Author(s) -
ChaurShiuh Young,
Yueh-Ju Lin,
Fei-Liang Chien,
ChiaHui Chen
Publication year - 2015
Publication title -
asian journal of finance and accounting
Language(s) - English
Resource type - Journals
ISSN - 1946-052X
DOI - 10.5296/ajfa.v7i2.8318
Subject(s) - earnings , pace , business , earnings management , volatility (finance) , earnings response coefficient , monetary economics , order (exchange) , stock market , accounting , economics , financial economics , finance , paleontology , geodesy , horse , biology , geography
Recently, U.S. firms are switching CEO at the fastest pace and these events often cause severe stock market volatility on the uncertainty of the firm’s future performance. This study investigates whether inverse market reaction on CEO succession will induce earnings management of new CEOs in order to protect their reputational and career prospects. From a sample of 2,418 firm-years during the post-SOX period of 2003 to 2012 by applying the regression analysis, we investigate two associations of real earnings management (REM) with CEO successions and with its market reaction respectively. Our results suggest new CEOs are more careful when manipulate earnings through REM activities. However, REM is negatively associated with market expectations on CEO successions, implying new CEOs may utilize REM to reverse the first bad impressions held by investors. We provide a new perspective with regard to market reactions to CEO successions, by examining how and why new CEOs may choose to manipulate earnings.