CEO Succession, Investor Expectations, and Real Earnings Management

  • Chaur-Shiuh Young National Cheng Kung University
  • Yueh-Ju Lin Kainan University
  • Fei-Liang Chien Kainan University
  • Chia-Hui Chen National Dong Hwa University
DOI: https://doi.org/10.5296/ajfa.v7i2.8318

Abstract

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.

Author Biographies

Chaur-Shiuh Young, National Cheng Kung University

Department of Accountancy and Graduate Institute of Finance & Banking

Professor

 

Yueh-Ju Lin, Kainan University

Dept. of Accounting,

Assistant Professor

Fei-Liang Chien, Kainan University

Dept. of Accounting,

Assistant Professor

Chia-Hui Chen, National Dong Hwa University

Dept. of Accounting,

Assistant Professor

Published
2015-10-12
Issue
Vol. 7 No. 2 (2015)
Section
Research Articles

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