Pump and jump: Earning management around voluntary CFO turnover

This dissertation examines earnings management and its consequences around voluntary, non-routine turnover of Chief Financial Officers, whom the 2002 Sarbanes-Oxley Act made explicitly responsible for the integrity of financial reports. The results suggest that between 1992 and 2002, prior to the advent of Sarbanes-Oxley, CFOs manage earnings upward prior to moving to a new employer. In contrast, in 2003 and 2004, during the post-SOX period---a changed environment in which the penalties for financial misstatements increased for both the CFO and CEO---CFOs appear to signal their talents via the conservatism of their reported earnings numbers before they move to another employer.;I also investigate whether firms that experience CFOs "pump and jump" take a "big bath" afterwards. Prior literature has attributed the "big bath" solely to the new executive's desire to increase future firm income. The results of this study indicate that there is no a significant association between discretionary accruals prior to and after CFO jumps.;Since most of the CFO jumpers become CFO in their new firms, I test whether they also manage earnings in their new employers. I find that the level of discretionary accruals prior to CFO departure at predecessor firms is positively related to the level of discretionary accruals at the new firm. This result suggests that the newly hired CFOs who inflate earnings before jumping are also more likely to do the same at their new firm. Alternatively, CFOs might select firms that have characteristics of their old firms, where they could readily transfer their human capital.;The results of investigating the effect of "pumping and jumping" on the new CFOs compensation at the new firm show that total direct compensation at the new firm at the first full year of the CFOs tenure is negatively associated with the level of earnings management both at the old and the new firm. This result could be an indication that the market efficiently evaluates the performance of the new CFOs and their old firms and the CFOs compensation in the new firm is adjusted accordingly.