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The influence of executive age, career horizon and incentives on pre-turnover earnings management

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  • Wallace Davidson

    ()

  • Biao Xie
  • Weihong Xu

    ()

  • Yixi Ning

    ()

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    Abstract

    In this paper we hypothesize that CEOs will be motivated to manage earnings prior to a turnover decision. This motivation comes from the horizon problem for CEOs nearing retirement age and for CEOs whose profit-based bonus is a large portion of their total compensation. We find that firms in which CEOs are nearing retirement age have large discretionary accruals in the year prior to turnover. Although we find firms with a larger proportion of profit-based bonus pay have larger discretionary accruals, this result is not robust with the inclusion of control variables in the regressions. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s10997-007-9015-8
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Management & Governance.

    Volume (Year): 11 (2007)
    Issue (Month): 1 (March)
    Pages: 45-60

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    Handle: RePEc:kap:jmgtgv:v:11:y:2007:i:1:p:45-60

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    Web page: http://www.springerlink.com/link.asp?id=102940

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    References

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    1. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    2. Yermack, David, 2006. "Golden Handshakes: Separation Pay for Retired and Dismissed CEOs," SIFR Research Report Series 41, Institute for Financial Research.
    3. Gaver, Jennifer J. & Gaver, Kenneth M. & Austin, Jeffrey R., 1995. "Additional evidence on bonus plans and income management," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 3-28, February.
    4. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
    5. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
    6. Brickley, James A. & Linck, James S. & Coles, Jeffrey L., 1999. "What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives," Journal of Financial Economics, Elsevier, vol. 52(3), pages 341-377, June.
    7. Peter Wells, 2002. "Earnings management surrounding CEO changes," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(2), pages 169-193.
    8. Dedman, Elisabeth & Lin, Stephen W. -J., 2002. "Shareholder wealth effects of CEO departures: evidence from the UK," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 81-104, January.
    9. Guidry, Flora & J. Leone, Andrew & Rock, Steve, 1999. "Earnings-based bonus plans and earnings management by business-unit managers1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 113-142, January.
    10. Brickley, James A., 2003. "Empirical research on CEO turnover and firm-performance: a discussion," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 227-233, December.
    11. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
    12. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
    13. Paul Hribar, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 105-134, 03.
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    Cited by:
    1. Sharma, Vaibhav & Hsieh, Chialing, 2011. "Managerial horizons in stock financed mergers," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 152-161, May.
    2. Hou, Wanrong & Li, Sali & Priem, Richard L., 2013. "How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures," Journal of International Management, Elsevier, vol. 19(2), pages 138-151.
    3. Berezinets, Irina & Ilina, Yulia & Muravyev, Alexander, 2011. "CEO and Board Characteristics as Determinants of Private Benefits of Control: Evidence from the Russian Stock Exchange," IZA Discussion Papers 6256, Institute for the Study of Labor (IZA).
    4. Bornemann, Sven & Pfingsten, Andreas & Kick, Thomas & Schertler, Andrea, 2014. "Earnings baths by bank CEOs during turnovers," Discussion Papers 05/2014, Deutsche Bundesbank, Research Centre.
    5. Emilia Peni, 2014. "CEO and Chairperson characteristics and firm performance," Journal of Management and Governance, Springer, vol. 18(1), pages 185-205, February.

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