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Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers

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  • Ghosh, Aloke (Al)
  • Wang, Jun

Abstract

We study the effects of accounting losses on chief executive officer (CEO) turnover. If accounting losses provide incremental information about managerial ability, boards can utilize the information in losses to assess CEOs’ stewardship of assets, which is why losses may serve as a heuristic for managerial failure. We find a positive relation between losses and subsequent CEO turnover after controlling for other accounting and stock-performance measures. We also find that losses are associated with an increase in board activity and that losses predict poor operating performance and future financial problems. Our results explain why CEOs manage earnings to avoid losses.

Suggested Citation

  • Ghosh, Aloke (Al) & Wang, Jun, 2019. "Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 877-906, April.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:02:p:877-906_00
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    Cited by:

    1. Kettunen, Jukka & Martikainen, Minna & Voulgaris, Georgios, 2021. "Employment policies in private loss firms: Return to profitability and the role of family CEOs," Journal of Business Research, Elsevier, vol. 135(C), pages 373-390.
    2. Katharine D. Drake & Ellen Engel & Melissa A. Martin, 2023. "Investigating discretion in executive contracting: extracting private information from valuation allowance decisions," Review of Accounting Studies, Springer, vol. 28(2), pages 533-569, June.
    3. Ma, Mingze, 2022. "Gendered performance evaluation in CEO turnover," Journal of Corporate Finance, Elsevier, vol. 77(C).
    4. Jiang Cheng & J. David Cummins & Tzuting Lin, 2021. "Earnings management surrounding forced CEO turnover: evidence from the U.S. property-casualty insurance industry," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 819-847, April.
    5. Li, Ziyang & Chen, Yanjun & Li, Yanlin, 2023. "Top management abnormal turnover and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    6. Chemmanur, Thomas J. & Hu, Gang & Li, Yingzhen & Xie, Jing, 2021. "Institutional trading, information production, and forced CEO turnovers," Journal of Corporate Finance, Elsevier, vol. 67(C).

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