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Do New Brooms Sweep Clean? Evidence that New CEOs Take a ‘Big Bath’ in the Banking Industry

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  • Chung-Hua Shen
  • Chien-An Wang

Abstract

This study investigates whether significant changes exist in providing loan losses and loan charge-offs during turnovers of chief executive officers (CEOs). Providing loan losses is referred to as a ‘big bath in earnings’, and providing loan charge-offs is referred to as a ‘big bath in asset quality’. We classify CEO turnovers into three types, namely, forced and voluntary CEO turnovers in privately owned banks (POB), turnovers in government-owned banks (GOB) and turnovers as outcomes of mergers and acquisitions (M&As). Using findings based on the data of Taiwanese commercial banks, we demonstrate that the forcibly appointed CEOs exhibit big baths in earnings and asset quality, whereas the voluntarily appointed CEOs exhibit a big bath in earnings but not in asset quality. Compared with the CEO turnover in a POB, the appointed CEO in a GOB shows no big bath in either earnings or asset quality. Moreover, turnovers resulting from M&As do not induce big baths. JEL Classification: C23, G21, G28, M41, M48

Suggested Citation

  • Chung-Hua Shen & Chien-An Wang, 2019. "Do New Brooms Sweep Clean? Evidence that New CEOs Take a ‘Big Bath’ in the Banking Industry," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1), pages 106-144, April.
    • Handle: RePEc:sae:emffin:v:18:y:2019:i:1:p:106-144
    DOI: 10.1177/0972652719831543
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    More about this item

    Keywords

    CEO turnover; earnings management; big bath; loan loss provision; charge-offs;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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