Management Changes, Reputation, and "Big Bath"-Earnings Management

We study the effects of managerial turnover on earnings management activities in a model in which managers care about their external reputation. We develop an overlapping generations model showing that both outgoing and incoming managers bias reported earnings such that typically very low returns ar...

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Bibliographic Details
Published inJournal of economics & management strategy Vol. 24; no. 3; pp. 501 - 522
Main Authors Nieken, Petra, Sliwka, Dirk
Format Journal Article
LanguageEnglish
Published Cambridge Blackwell Publishing Ltd 01.09.2015
Wiley Subscription Services, Inc
Subjects
career concerns
Deferred compensation
Earnings
Earnings management
Economic analysis
Economic incentives
Employee turnover
Financial management
image concerns
Management
management turnover
Managers
Occupations
Overlapping-generations model
reputational concerns
Reputations
Studies
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Summary:We study the effects of managerial turnover on earnings management activities in a model in which managers care about their external reputation. We develop an overlapping generations model showing that both outgoing and incoming managers bias reported earnings such that typically very low returns are reported in the first period after a manager has been replaced. Outgoing managers shift earnings forward to their last period in office as they will not benefit from earnings realized after that. Incoming managers can have an incentive to shift earnings to the second period in office as reported earnings will, immediately after a management change, only be partly attributed to their own ability. Deferred compensation can reduce incentives for earnings management.
Bibliography:istex:D6E935F20EF3195A32F72C315D69BFBEB244D413
ArticleID:JEMS12101
ark:/67375/WNG-969WNT35-T
We thank the coeditor, two anonymous referees, and Jörg Budde for helpful comments and suggestions. Financial support by the Deutsche Forschungsgemeinschaft (DFG), in particular DFG Research Unit “Design and Behavior,” FOR1371 and SFB TR/15, is gratefully acknowledged.
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ISSN:1058-6407
1530-9134
DOI:10.1111/jems.12101