Management Changes,Reputation, and “Big Bath”—Earnings Management |
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| Authors: | Petra Nieken Dirk Sliwka |
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| Institution: | 1. Karlsruhe Institute of Technology, Institute of Management, Karlsruhe, Germany;2. UiS Business School, Department of Economics, University of Stavanger, Stavanger, Norway;3. Seminar of Personnel Economics and HRM, University of Cologne, Albertus‐Magnus‐Platz, Cologne, Germany |
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| 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. |
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| Keywords: | earnings management management turnover reputational concerns career concerns image concerns |
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