Management Changes, Reputation, and “Big Bath”—Earnings Management

Petra Nieken and Dirk Sliwka

Journal of Economics & Management Strategy, 2015, vol. 24, issue 3, 501-522

Abstract: 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.

Date: 2015
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