Earnings baths by CEOs during turnovers: empirical evidence from German savings banks

Sven Bornemann, Thomas Kick, Andreas Pfingsten and Andrea Schertler ()

Journal of Banking & Finance, 2015, vol. 53, issue C, 188-201

Abstract: Existing research documents that incoming CEOs in non-financial firms tend to take an “earnings bath”. They reduce their first year’s profits through discretionary expenses, blame the “bad outcome” on their predecessors, lower the performance benchmark, and save income for subsequent accounting periods. Identifying such an earnings bath for incoming CEOs in banks requires us to disentangle under-provisioning, which may have triggered the turnover event, and the earnings bath. For a sample of German savings banks over the period 1993–2012, we find that incoming CEOs increase discretionary expenses and that this increase is stronger for incoming CEOs from outside the bank than for insiders. We further show that CEOs coming from outside increase discretionary expenses during their first year in charge even if the default risk of the bank is low and the stock of risk provisions relative to risk exposure is high. Therefore, we conclude that the effects are only partially driven by incoming CEOs who rectify discretionary expenses by insufficient existing risk provisions, and that big bath accounting plays an important role in explaining discretionary expenses during CEO turnovers.

Keywords: CEO turnover; Earnings management; Big bath accounting; Discretionary expenses; Financial institutions (search for similar items in EconPapers)
JEL-codes: C23 G21 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:53:y:2015:i:c:p:188-201

DOI: 10.1016/j.jbankfin.2014.12.005

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