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Earnings Management Surrounding CEO Turnover: Evidence from Korea

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  • Jong-Seo Choi
  • Young-Min Kwak
  • Chongwoo Choe

Abstract

type="main"> This article examines the empirical relation between chief executive officer (CEO) turnover and earnings management in Korea using a sample of 403 CEO turnovers and 806 non-turnover control firms during the period 2001–2010. We classify CEO turnovers into four types depending on whether the departure of the outgoing CEO is peaceful or forced and whether the incoming CEO is promoted from within or recruited from outside the firm. We measure earnings management by both discretionary accruals and real activities management. We also control for the endogeneity of CEO turnover and a potential selection bias using 2SLS and Heckman's two-stage approach. After controlling for corporate financial performance and governance structure, we find upward earnings management by the departing CEO only when the departure is forced and the new CEO is an insider. In this case, the new CEO also engages in downward earnings management using both discretionary accruals and real activities management. We also find some evidence that the new CEO recruited from outside the firm manages discretionary accruals upward following the peaceful departure of his predecessor. In all other types of CEO turnover, we do not find evidence of significant earnings management by either CEO.

Suggested Citation

  • Jong-Seo Choi & Young-Min Kwak & Chongwoo Choe, 2014. "Earnings Management Surrounding CEO Turnover: Evidence from Korea," Abacus, Accounting Foundation, University of Sydney, vol. 50(1), pages 25-55, March.
    • Handle: RePEc:bla:abacus:v:50:y:2014:i:1:p:25-55
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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