Earnings management surrounding CEO turnover: evidence from Korea

Jong-Seo Choi, Young-Min Kwak and Chongwoo Choe

MPRA Paper from University Library of Munich, Germany

Abstract: This article examines the empirical relation between CEO turnover and earnings management in Korea using a sample of 317 CEO turnovers and 634 non-turnover control firms during the period of 2001-2008. We classify CEO turnovers into four types depending on whether the departure of outgoing CEO is peaceful or forced and 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 potential endogeneity of CEO turnover using 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 predecessor. In all other types of CEO turnover, we do not find evidence of significant earnings management by either CEO.

Keywords: CEO turnover; earnings management; financial performance; corporate governance; Korea Stock Exchange (search for similar items in EconPapers)
JEL-codes: G30 G32 M51 (search for similar items in EconPapers)
Date: 2012-08-01
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Related works:
Journal Article: Earnings Management Surrounding CEO Turnover: Evidence from Korea (2014)
Working Paper: Earnings Management Surrounding CEO Turnover: Evidence from Korea (2012)
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