CEO Change, Successor Characteristics And Earnings Management

In recent years, it occurs that the executives of listed companies changefrequently. The change will cause major changes in senior management personnel ofthe enterprise, which will lead to a substantial decline in business performance andthe company’s stock price. Sometimes executives change is also accompanied withearnings management. The occurrence of a series of financial scandals at home andabroad makes it difficult for investors to continue to trust the financial statements ofthe company. Investors begin to suspect that these events are not accidental,managers of the company does not perform due diligence obligations conscientiously,which result in the Company’s financial fraud frequently. The company’s managerglosses the financial statements through earnings management, so as to realize theirown interests or the interests of the company. Earnings information is a veryimportant part of financial information, accounting earnings can reflect the quality ofthe company’s operating conditions to some extent. Investors rely on the companyannounced financial statements to make invest decision. But the earningsmanagement behavior of manager leads a serious error in financial statements, whichmake direct damage to the interests of investors. Therefore, the impact of CEOchange on earnings management has attracted wide attention of theorists andpractitioners.Based on the above background, this paper use2007-2013A-share listedcompany’s data to study the impact of CEO change on the extent of earningsmanagement. We also explore the effects successor’s characteristics on earningsmanagement. The empirical results show that, the successor CEO will then greatly reduce the earnings of enterprises for the consideration of performance andself-image. The successor CEO makes significantly negative earnings management inorder to achieve reversing profit after his successor. Selecting a new successormainly has two channels, such as internal selection and external recruitment. So thepaper analysts the impact of successor source on earnings management. The resultsshow that compared with the internal successor CEO, external successor CEO takes amore significant negative earnings management. In addition, this paper analyzes theimpact of CEO succession behavioral characteristics on earnings management fromthe perspective of behavioral finance. In this paper, the study will divide successorCEO into overconfidence CEO and non-overconfidence successor. The empiricalresults show that in the year CEO succession, overconfidence successoroverconfidence take relatively lower level of negative earnings management than nonoverconfidence successor.According to research findings, this paper proposes policies to facilitate thesustainable development of China’s securities market. The Commission shouldstrengthen the supervision of listed companies, especially listed companies whoseCEO has changed. The Commission should require these companies to disclose moredetailed earnings information, and request managers to make a reasonableexplanation for the unusual earnings. Rely solely on the strength of the SFC does notcompletely eliminate the company’s earnings management behavior, but also need tostrengthen their management to stop managers from earnings management in thesource. First, the company should try to ensure management stability, avoid frequentchanges to the CEO. In addition, the company should make a survey of the quality ofa new successor, without affecting the company’s future development. The companyshould take successor source and psychological characteristics into consideration.