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Earnings Management Surrounding Top Executive Turnover in Japanese Firms

Author

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  • Miranda Lam Detzler

    (Department of Accounting and Finance, College of Management, University of Massachusetts, Boston, USA)

  • Susan M. Machuga

    (Department of Accounting, Central Connecticut State University, USA)

Abstract

This study examines the patterns of four discretionary financial variables surrounding president turnovers in Japanese firms. A new theory for earnings management, thecoachinghypothesis, and three previously tested theories, thehorizon,cover-up, andbig bathhypotheses, are investigated. Our empirical results reinforce the importance of controlling for firm performance when testing earnings management. For routine turnovers, the evidence is consistent with thecoachinghypothesis, which predicts mutual interests between incoming and outgoing presidents to portray a triumphant transition. We also find evidence for thehorizonhypothesis, in that outgoing presidents in routine turnovers attempt to increase earnings during their last years, but the extent of the horizon problem may be curtailed by incentives to preserve a successful transition, thecoachinghypothesis. For non-routine turnovers, we find little evidence of outgoing presidents attempting tocover uppoor performance by employing income-increasing strategies. We also find weak support for thebig bathhypothesis, which predicts incoming presidents of non-routine turnovers to decrease earnings in the transition year in order to report improved earnings in the following year.

Suggested Citation

  • Miranda Lam Detzler & Susan M. Machuga, 2002. "Earnings Management Surrounding Top Executive Turnover in Japanese Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 343-371.
    • Handle: RePEc:wsi:rpbfmp:v:05:y:2002:i:03:n:s021909150200081x
    DOI: 10.1142/S021909150200081X
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    Cited by:

    1. Rajiv D. Banker & Dmitri Byzalov & Shunlan Fang & Byunghoon Jin, 2020. "Operating asymmetries and non-linear spline correction in discretionary accrual models," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 803-850, April.
    2. Lai, Yi-Hsun & Tai, Vivian W., 2019. "Managerial overconfidence and directors' and officers' liability insurance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Chia-Hsien Tang & Yen-Hsien Lee & Ming-Chih Lee & Ya-Ling Huang, 2020. "CEO Characteristics Enhancing the Impact of CEO Overconfidence on Firm Value After Mergers and Acquisitions — A Case Study in China," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-19, March.

    More about this item

    Keywords

    Earnings management; Executive turnover; Japanese firms;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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