Managerial Overconfidence and Accounting Behavior following CEO Turnover

Abstract

This paper empirically investigates the relationship between managerial overconfidence and write-offs following CEO turnover. Subsequent to managerial turnover, it is often observed that large one-time charges are used to decrease current earnings for the benefit of higher future earnings. This earnings management technique, commonly referred to as big bath accounting, facilitates the meeting of given future earnings targets. Overconfident managers overestimate their abilities and consequently have upwardly biased expectations concerning future firm performance. Based on this premise, we hypothesize that overconfident CEOs see less need to engage in an earnings bath following managerial change in order to boost future earnings. Our empirical results confirm this hypothesis showing that earnings baths at CEO turnover are significantly more frequent only among non-overconfident CEOs.