CEOs’ extensive term of office inhibits discretionary accruals

Cristian Baú Dal Magro,Roberto Carlos Klann,Vanessa Edy Dagnoni Mondini

doi:10.1108/rausp-06-2018-0033

Abstract

PurposeCEOs’ (chief executive officer) term of office may explain discretionary accruals as a result of opportunistic behavior arising during certain periods of the term of office. Therefore, CEOs, in their early years of office, have incentives to report results that meet market expectations. In turn, CEOs in their senior year may be motivated to use discretionary accruals to gain private benefits. In this scenario, corporate governance mechanisms play an important role in monitoring relationships. Hence, the purpose of this study is to verify the influence of monitoring mechanisms on the relationship between CEOs’ term of office and discretionary accruals.Design/methodology/approachDescriptive statistics, multiple cross-sectional regression to estimate the accruals and regression of panel data to test the hypotheses were used. The sample comprised 195 companies listed on BM&FBovespa.FindingsThe results indicated that CEOs’ long term of office has a negative impact on the level of discretionary accruals, and thus, Brazilian CEOs with a longer term of office tend to establish a certain reputation in the stock market. On the other hand, it is concluded that CEOs’ intentions, in the first years of term, are positively related to the use of accruals and that the monitoring mechanisms can minimize these CEOs’ opportunistic practices.Originality/valueThe results broaden the literature on corporate governance, pointing that different systems of variable remuneration may influence CEOs’ willingness to manage results in their last year of term.

Highlights

The financial scandals that led to the collapse of large corporations resulted, partly, from opportunistic manipulation of accounting information
Discussion of findings The results indicated that the level of discretionary accumulations is higher in firms with CEOs in the first years of their term, confirming the findings of previous studies (Holmstrom, 1982; Hermalin and Weisbach, 1998; Brickley et al, 1999; Cella et al, 2014; Ali and Zhang, 2015), which may indicate that such CEOs would be concerned about demonstrating market competence and/or that they would seek to increase earnings linked to results
This result is evidenced by the test of the time of CEOs’ term variable, whose findings demonstrated a negative relation between term time and the use of discretionary accruals, indicating that the shorter the term of CEOs, the better the results management practices

Summary

Introduction

The financial scandals that led to the collapse of large corporations resulted, partly, from opportunistic manipulation of accounting information. © Cristian Baú Dal Magro, Roberto Carlos Klann and Vanessa Edy Dagnoni Mondini. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

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