Earnings Management Surrounding Top Executive Turnover in Japanese Firms

Miranda Lam Detzler and Susan M. Machuga ()
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Miranda Lam Detzler: Department of Accounting and Finance, College of Management, University of Massachusetts, Boston, USA
Susan M. Machuga: Department of Accounting, Central Connecticut State University, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2002, vol. 05, issue 03, 343-371

Abstract: This study examines the patterns of four discretionary financial variables surrounding president turnovers in Japanese firms. A new theory for earnings management, thecoachinghypothesis, and three previously tested theories, thehorizon,cover-up, andbig bathhypotheses, are investigated. Our empirical results reinforce the importance of controlling for firm performance when testing earnings management. For routine turnovers, the evidence is consistent with thecoachinghypothesis, which predicts mutual interests between incoming and outgoing presidents to portray a triumphant transition. We also find evidence for thehorizonhypothesis, in that outgoing presidents in routine turnovers attempt to increase earnings during their last years, but the extent of the horizon problem may be curtailed by incentives to preserve a successful transition, thecoachinghypothesis. For non-routine turnovers, we find little evidence of outgoing presidents attempting tocover uppoor performance by employing income-increasing strategies. We also find weak support for thebig bathhypothesis, which predicts incoming presidents of non-routine turnovers to decrease earnings in the transition year in order to report improved earnings in the following year.

Keywords: Earnings management; Executive turnover; Japanese firms (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S021909150200081X

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