Abstract
AbstractThis paper studies reappointment of a chief executive officer (CEO) and succession events in listed family firms with an incumbent family CEO. We explore whether family firms with a founder CEO are more likely to engage in earnings management preevent than other family firms. We find evidence of preevent upward earnings management for firms that reappoint their founder CEO but no for other family firms. These findings suggest that the costs and benefits from earnings management change around founder CEO reappointments in family firms. Investors, auditors, policymakers and regulators should be aware of the temptation of founder CEOs to inflate earnings preceding their reappointment.
Highlights
Though the literature on earnings management is extensive and mature, Burgstahler and Chuk (2017, p. 741) identify ‘[a] potentially important area for future research [which] is exploration of changes over time in costs and benefits of earnings management to meet benchmarks’
We argue that founder chief executive officer (CEO) who are up for reappointment and intend on remaining as the CEO are more likely to engage in earnings management to improve net earnings in the year(s) preceding the reappointment
This paper studies accrual‐based earnings management around the reappointment and the replacement of the incumbent family CEO in family firms from France, Germany and the United Kingdom
Summary
Though the literature on earnings management is extensive and mature, Burgstahler and Chuk (2017, p. 741) identify ‘[a] potentially important area for future research [which] is exploration of changes over time in costs and benefits of earnings management to meet benchmarks’. We maintain that founder CEOs who opt for reappointment, given their greater socioemotional attachment to their firm than later‐generation family CEOs, engage in earnings management to report good performance in the year preceding their reappointment. We find some evidence that French and German family firms engage in more earnings management around a family CEO succession or reappointment than UK firms This result is in line with Leuz et al (2003) who find that earnings management is more prevalent in countries with weak investor protection. Six of the above variables control for the entrenchment effect on earnings management They are family wedge (which would adjust for the presence of dual‐class shares, including the proportion of nonvoting shares), board independence, CEO‐chair duality, duality‐destroying event, and departing founder CEO on board postevent. Out of the 240 firms, 190 firms are involved in one event, 38 are involved in two events during the period of study, nine firms in three events, two firms in four events and one firm in five events
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