CEO Change And Earnings Management Evolution

In recent year the link between earnings management and corporate governance has always been a hot topic among the academia.Meanwhile the CEO turnover rate of Chinese listed companies always maintains a high level,which not only raised the attention of the public about corporate governance,but also expand the academia's research sphere to earnings management caused by CEO turnover.Earnings management is divided into two categories:accrual-based earnings management and real earnings management.There have been adequate research about the relationship between CEO turnover and earnings management,the result of which shows that in the year of CEO turnover,companies always have negative earnings management behavior,but in the year that follows,they will have positive earnings management behavior.But it has to be emphasized that these results were based on the research using the data before the year of 2007,in which year the new Enterprise Accounting Standards of China went into effect.Concerning that there has been reduction of flexibility in the new accounting standards,the accrual-based earnings management should be restricted for those listed companies.So,this research take the A-Share listed companies as example and the research period will be 2011-2014.This research will be conducted in the context of the new Enterprise Accounting Standards to have deep investigation about the relationship between CEO turnover and accrual-based earnings management.Compared with prior research we will also include real earnings management in the meantime,the purpose of which is not to investigate in the impact that CEO turnover has on accrual-based earnings management and real earnings management separately,but to find the internal link and the alternative relations between accrual-based earnings management and real earnings management when CEO turnover happens.This research will observe the relationship between CEO turnover and earnings management from three time points:the year that turnover happens,the year after the turnover and two years after the turnover,the purpose of which is to have a full grasp of the earnings management features shown in different periods after CEO turnover.The research is conducted under the purpose of helping stakeholders to comprehend the earnings information correctly,helping China Securities Regulatory Commission to regulate earnings management,urging listed companies to complete internal governance.This research observes that in the year of turnover,the new CEO has strong incentive to manage earnings downwards in order to set a lower start point for his/her own performance,and to blame the manipulated low earnings on the prior CEO.But there is no sign of real earnings management in the year of turnover,as the new CEO is in control of limit resources to manipulate real activities and real earnings management has much larger negative impact on the future performance of the company compared with accrual-based earnings management.As accrual-based earnings management is a substitute for real earnings management,companies manipulate accruals for negative earnings management,showing that the new accounting standards have limited impact on negative earnings management behaviors.This research also finds that in the year after CEO turnover and the second years after CEO turnover,there isn't significant accrual-based earnings management behavior for those companies,which is contradictory to prior research based on pre-2007 samples,indicating that the new accounting standards impose restriction on positive accrual-based earnings management.In the second year after CEO turnover there is significant positive real earnings management.The research also verified the substitutability between real earnings management and accrual-based earnings management by investigating in the control variables of the regression model.