Do New Brooms Sweep Clean? Evidence that New CEOs Take a ‘Big Bath’ in the Banking Industry

This study investigates whether significant changes exist in providing loan losses and loan charge-offs during turnovers of chief executive officers (CEOs). Providing loan losses is referred to as a ‘big bath in earnings’, and providing loan charge-offs is referred to as a ‘big bath in asset quality...

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Bibliographic Details
Published inJournal of emerging market finance Vol. 18; no. 1; pp. 106 - 144
Main Authors Shen, Chung-Hua, Wang, Chien-An
Format Journal Article
LanguageEnglish
Published New Delhi, India SAGE Publications 01.04.2019
Subjects
charge-offs
CEO turnover
earnings management
big bath
loan loss provision
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Summary:This study investigates whether significant changes exist in providing loan losses and loan charge-offs during turnovers of chief executive officers (CEOs). Providing loan losses is referred to as a ‘big bath in earnings’, and providing loan charge-offs is referred to as a ‘big bath in asset quality’. We classify CEO turnovers into three types, namely, forced and voluntary CEO turnovers in privately owned banks (POB), turnovers in government-owned banks (GOB) and turnovers as outcomes of mergers and acquisitions (M&As). Using findings based on the data of Taiwanese commercial banks, we demonstrate that the forcibly appointed CEOs exhibit big baths in earnings and asset quality, whereas the voluntarily appointed CEOs exhibit a big bath in earnings but not in asset quality. Compared with the CEO turnover in a POB, the appointed CEO in a GOB shows no big bath in either earnings or asset quality. Moreover, turnovers resulting from M&As do not induce big baths. JEL Classification: C23, G21, G28, M41, M48
ISSN:0972-6527
0973-0710
DOI:10.1177/0972652719831543