Abstract
Following a change in CEO, US firms manage earnings downward by adjusting real business activities and accruals. The magnitude of real earnings management is more than double that of accrual-based earnings management. These earnings “baths” are more pronounced after non-routine and external CEO successions. Because CEO turnover and restructuring are often concurrent, negative real earnings management measures can be confounded with legitimate restructuring. Our results suggest that the new CEO real earnings bath is real. A real earnings bath in the first year of CEO tenure reverses strongly, causing a temporary and significant improvement in earnings in the second year. This systematic reversal pattern is consistent with earnings management. In addition, real earnings management in the first year of CEO tenure is not associated with long-term performance improvements or positive abnormal stock returns, contrary to what would be expected in a successful restructuring. JEL classifications: C23, G30, M41
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