Interactive Reporting Bias Surrounding CEO Turnover

Download or read book Interactive Reporting Bias Surrounding CEO Turnover written by Chia-Feng (Jeffrey) Yu and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes how CEO turnover affects successive CEOs' financial reporting decisions and the capital market price. I show that when an outgoing CEO (O) in period 1 is succeeded by an incoming CEO (N) in period 2, strategic interaction between O and N leads to interlinked earnings reports. Specifically, when the level of earnings reported by O is lower, N's reporting strategy is more likely to feature a downward reporting bias. Furthermore, by a comparison of the two-CEO setting with a setting with no CEO turnover, I show that with CEO turnover, (i) the period 2 earnings report is more sensitive to the private information of the CEO in control and less sensitive to the period 1 earnings report; (ii) the period 1 earnings report is more sensitive to the private information of the CEO in control; and (iii) the equilibrium stock price has the same sensitivities towards the associated risks, but is less sensitive to the periods 1 and 2 earnings reports. These results provide a novel explanation for managerial under-reporting bias based on strategic interaction between successive CEOs and shed light on the role of CEO turnover in earnings management behavior and capital market responses.