Real Earnings Management and CFO Turnover-Evidence from China

Abstract

This study investigates whether a firm’s forced CFO turnover is influenced by the extent of a firm’s real earnings management (REM) activities in China. We find that the likelihood of forced CFO turnover is positively associated with the extent of REM, contrast to no such association for voluntary CFO turnover. Such association is primarily due to the manipulation of discretionary expenses, but not manipulation of production costs or cash flow management. Our findings are robust after controlling for the effect of accrual earnings management (AEM), firm performance, and corporate governance. We also address such issues as endogeneity, persistence of REM after CFO’s turnover, the impact of directions of REM on CFO turnover and the effect of CEO turnover. Our findings indicate that boards of directors in China play an important role in disciplining CFOs when they engage in REM activities.