The Association between Executive Turnover and Financial Misreporting: Evidence from Germany

Abstract

This paper investigates personal consequences for management executives in the context of financial misreporting exposed by German enforcement institutions. More specifically, we examine CEO and CFO turnover in the context of an error announcement. By doing so, we compare 103 firms that issued an error announcement between 2006 and 2013 with industry-and-size-matched control firms. First, we find notable differences in executive turnover for the five-year period including two years before and after the year of the error announcements. Second, we show that the likelihood for executive turnover is significantly associated with executive tenure, firm size, firm performance, and chairperson turnover. However, multivariate analysis does not provide similar evidence for financial misreporting. Third, our analysis of the error announcements’ characteristics indicates that the probability for executive turnover particularly increases for errors related to professional judgment and management report issues. That is, executives face personal consequences for non-appropriate use of its discretion.