Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311917 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Business Economics [ISSN:] 1861-8928 [Volume:] 92 [Issue:] 8 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2022 [Pages:] 1249-1281
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
Following executive turnovers big bath accounting is often observed. We investigate a new manager's earnings management incentives in his first year in office in a two-period model with career concerns and earnings' lack of timeliness. We determine the optimal incentive contract and decompose the manager's equilibrium earnings management into two components: an explicit incentive resulting from the compensation contract and an implicit incentive from career concerns. While career concerns always motivate the manager to shift earnings backwards, the optimal contract induces the manager to either shift earnings forwards or backwards. In particular, we show that with optimal contracts a "negative" big bath may result in equilibrium, i.e., the manager may inflate earnings after a CEO turnover. We demonstrate how the optimal contract and the equilibrium earnings management strategy depend on the earnings' timeliness, the precision of the initial information about the manager's ability and the intensity of competition for CEOs. Our results may help to explain why big bath accounting after a CEO turnover is observed in many but not in all cases.
Subjects: 
Earnings management
Big bath accounting
Career concerns
Contracting
CEO turnover
JEL: 
D82
G34
M12
M41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.