Earnings management surrounding CEO turnover in the context of Malaysian firms

Abstract

The responsibility of the preparation and presentation of financial accounts lies on the management of the firm. Above all the management team, the Chief Executive Officer (CEO) retains the overall accountability of the firms operation and performance. As such, the CEO should hold tight to his objective of managing in the best interest of the firm and its stakeholders. However, the recent spate of grand-scale corporate scandals has markedly shown how corporation leaders such as CEOs have gone astray by indulging in self interest practice through manipulation of reported earnings. Therefore, this research is an empirical study of whether CEOs manage earnings during the period close to Malaysian firms’ CEO turnover event. This study also seeks to find the association between the earnings management behaviour of the CEOs and the executive succession process. Earnings management practice of the CEOs is examined based on cover-up, horizon problem and earnings bath theories. The sample of the study consists of 55 firms listed in the Bursa Malaysia with CEO change occurrence during the financial year end 2000 – 2003. Earnings management practice of the departing and incoming CEOs during the period prior to CEO change (t-1) and the year of CEO change (t), respectively were tested through discretionary accruals. Generally, this study provides weak evidence of earnings management practice of both the departing and incoming CEOs. There is an indication of upwards earnings management practice of the departing CEOs with non-routine departing CEO appears to be managing earnings upwards more than the routine departing CEOs. Similarly, non-routine incoming CEOs appears to be managing earnings downwards more than the routine incoming CEOs. These results partially support earnings management practice as elucidated in cover-up, horizon problem and earnings bath theories.