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Earnings management surrounding forced CEO turnover: evidence from the U.S. property-casualty insurance industry

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  • Jiang Cheng

    (Lingnan University)

  • J. David Cummins

    (Temple University)

  • Tzuting Lin

    (National Taiwan University)

Abstract

In this paper, we investigate earnings management surrounding forced CEO turnover for U.S. property-casualty insurance companies with differing organizational forms. We analyze the three principal organizational form types in the industry—publicly-traded stocks, closely-held stocks, and mutuals. We utilize a unique measure of earnings management, the loss reserve error. Multivariate results show that all ownership types over-state earnings during our sample period whether or not forced turnover occurs. Over-statement is highest for publicly-traded stocks, followed by closely-held stocks and mutuals. Organizational form matters in constraining managerial opportunism in the presence of forced turnovers. Incumbent CEOs of publicly-traded stocks manage earnings upward prior to forced turnovers, consistent with the cover-up hypothesis, but this hypothesis is not consistently supported for mutuals or closely-held stocks. The univariate results support the big-bath hypothesis for closely-held stocks, but the multivariate results do not support the big-bath hypothesis for any organizational form. Finally, corporate governance matters—high board independence and large board sizes are associated with less income over-statement.

Suggested Citation

  • Jiang Cheng & J. David Cummins & Tzuting Lin, 2021. "Earnings management surrounding forced CEO turnover: evidence from the U.S. property-casualty insurance industry," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 819-847, April.
    • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:3:d:10.1007_s11156-020-00910-z
    DOI: 10.1007/s11156-020-00910-z
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    More about this item

    Keywords

    CEO turnover; Earnings management; Reserve error; Ownership structure; Property-casualty insurance;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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