CEO Tenure And Earnings Management

Earnings management is an important area in empirical research since the late 1980s. Earnings management behavior reduces the fairness of accounting information. It will mislead the decisions of investors and other stakeholders and will be store up problems for the future development of the company in the long term. Besides, it will affect the efficiency of resource allocation in Capital Market. Therefore, the study of earnings management can not only help the investors and other stakeholders to better understand the information of listed companies and help them making the right decisions, but also promoting to improve the corporate governance structure and standardize professional manager market. The main of earnings management is usually the company’s management, CEO is precisely one of the most important members. And executive tenure is one of the most important determinants of earnings quality of corporate financial reporting. Therefore, this paper argues that the study of the theory of occupation and the relationship between CEO tenure and earnings management degree has important theoretical and practical significance.This thesis examines changes in CEOs’incentive to manage the listed companies’ financial reports earnings during their tenure. This paper argues that the degree of CEOs’motivation to manage earnings will change at different times of their tenure. After testing Shenzhen and Shanghai A-share listed companies during 2001-2013, we got these conclusions that earnings management is greater in the first two years of CEO’s service than in the later years of CEO’s service. And the difference in earnings management between the first two years and the later years of CEO’s service is smaller in companies with stronger monitoring of CEOs. These results show that when the market is uncertain about the ability of newly appointed CEOs, CEOs are likely to have strong incentives to report good performance to get good reputation. Then in the later years of CEO’s service CEOs are less likely to engage in opportunistic behavior because of protecting their own reputation. In addition, consistent with the theory of CEO reputation mechanism and the model of CEO tenure five-stage, earnings management is greater in the CEOs’final year, but this result obtains only after controlling for earnings management in their first two years of service.According to the conclusions of this paper, we propose the following three suggestions:First, the relevant regulatory authorities need particularly be concerned about the listed companies’ financial reports in the first two years and the later years of CEO’s service; second, improve to strengthen the corporate governance mechanism; third, establish and improve the professional manager market.