CEO Change Research Articles

Income Smoothing, Idiosyncratic Risk & CEO Turnover

The article discussed the feasibility from the idiosyncratic risk point of view that CEO enhances the stability of its position by income smoothing. Taking the data of A-share companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange between 2005 and 2011, the article examined the direct influence of income smoothing upon change of CEO and its indirect influence upon change of CEO by influencing idiosyncratic risks. The article found that the increase of the income smoothing degree would significantly decrease the probability of change of CEO, while the increase of idiosyncratic risks would significantly increase the probability of change of CEO. In addition, the influence of income smoothing upon change of CEO, to a great extent, is realized by influencing idiosyncratic risks. The evidences used in the article show that one of CEO’s major motives to perform income smoothing is to safeguard its position.

Management discretion and the role of the stock market in goodwill impairment decisions - evidence from Finland

IAS 36 provides latitude to management in the impairment testing of goodwill assets, which may intensify agency conflict. In this study, we carry out an empirical analysis on goodwill impairment losses recognised by Finnish listed companies between 2005 and 2009. We document evidence that a change of CEO is associated with a goodwill write-off. Further, our results indicate that the size of a goodwill impairment loss is larger when the company's reported earnings would have been negative in the absence of the impairment charge, which points towards behaviour associated with earnings bath. However, we also report evidence that the monitoring function of the stock market may reduce asymmetric information concerning the carrying value of goodwill. These results suggest that regulators could benefit from focusing on monitoring compliance with the current goodwill accounting standards in firms which exhibit high levels of information asymmetry between investors and management.

When Is Good News Bad and Vice Versa? The Fortune Rankings of America's Most Admired Companies

Prior theory postulates that media coverage can increase (decrease) the value of a manager’s reputational capital and, as a consequence, enhance (diminish) his power to extract corporate resources for private consumption. An empirical implication that follows is that media events that increase (decrease) a manager’s reputational capital are good (bad) news for the CEO and bad (good) news for shareholders. We examine these predictions using increases and decreases in Fortune’s rankings of America’s Most Admired Companies as a measure of media-induced changes in CEO’s reputational capital. Consistent with the predictions, we find that increases (decreases) in ranking scores are associated with stock price decreases (increases). Further, and also consistent with the predictions, CEOs whose firms experience increases (reductions) in ranking scores experience increases (reductions) in compensation and in job tenure, and their firms undertake more (fewer) acquisitions and the acquisitions are less (more) value increasing.

Optimal Inside Debt Compensation and the Value of Equity and Debt

We study the effect of changes in CEO inside debt on equity and debt values during the period in which firms’ disclosure of inside debt increased. We predict optimal CEO relative debt-equity incentive ratios based on firm and CEO characteristics, and show that firms adjust their ratios towards the predicted optimums. Equity values rise for firms that adjust their ratios downward to their predicted optimums and for firms that adjust ratios upward toward their predicted optimums, which implies that some ratios were too low and others were too high. Debt values rise for firms that adjust their ratios upward and do not fall for those that adjust their ratios downward. Our predicted optimum explains changes in equity and debt values better than a simple and intuitive target where inside debt-equity ratios are set equal to firm debt-equity ratios. The results support an optimal contracting view of CEO inside debt and suggest important cross-sectional differences in firms’ optimal use of inside debt in compensation policies.

Is the New CEO 'Bath' Real?

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

Building a coaching culture in a small Australian multinational organisation

This case study charts the progress of a two-year programme to build a coaching culture at a small Australian multinational organisation. The intervention consisted of executive coaching and coaching skills workshops aimed principally at potential successors to the senior leadership team. Over the course of the programme the organisation went through many changes, including an organisational restructure and a change in CEO. The outcome of the intervention is discussed with reference to previously published models for implementing a coaching culture and to work on complex adaptive systems.

Debt capital, firm performance and change of CEO in firms listed on the Nairobi securities exchange

It is generally accepted that boards of directors play a fundamental role in corporate governance and the structure of the board plays a significant role in the functioning of a company (Jensen, 1993). The main objective of this study was to investigate the relationship between debt capital, firm performance, and change of CEO in firms listed on the NSE. The results of the study revealed that firms in which an individual shareholder has influence or controlling interest are reluctant to replace their CEO even when performance is below average. The results also revealed that the replacement of the CEO is not performance driven, but is debt capital driven. Specifically, the results suggest that medium leverage ratio is associated with change in CEOs on firms listed on the NSE.

Real Earnings Management Around CEO Turnovers

Following a change in CEO, US firms manage earnings downward by adjusting real business activities and accruals. The decision of new-CEO firms to give earnings a “bath” is influenced by CEO compensation, institutional investor concentration, analyst following, capital structure, and quarterly earnings pattern. The choice of real versus accrual-based earnings management strategies depends on the firm’s ability to use an accrual-based bath. These earnings baths are more pronounced after external CEO successions.

Structural and chemical changes of Zn-doped CeO2 nanocrystals upon annealing at ultra-high temperatures

Seemingly monophasic Zn-doped ceria nanocrystals contain substantial amounts of X-ray amorphous ZnO not detectable by standard XRD. This ZnO can be incorporated upon annealing at temperatures up to 1300 °C.

How long a tenure is long enough: CEOs tenure and its impact on firm’s performance.

In a typical corporate setting, a CEO is analogous to the captain of a ship with ultimate authority vested in him by the board of directors, which in turn is elected by the owners (shareholders) of the firm (Fama, E. F., & Jensen, M. C. 1983). During the period he heads the firm, it is expected from him to take wise decisions which benefits the firm in long/short term and the stakeholders of the firm become well off. However, the length of the tenure varies to a great degree from firm to firm. This paper attempts to find out the impacts of these different tenures on the performance of the firm per se. In addition to that it tries to unearth any possible discernible pattern in the CEO tenure over the time. It also looks if the remuneration generally increases with the number of years spent in a firm or is it attached to performance and tenure is meaningless for remuneration. Do CEOs with long tenure try to tweak with the firm’s capex (expenditure policy), existing dividend policy etc. are few of the questions attempted to be addressed in here. A change in the previously mentioned characteristics of the firm, would lead to a radical transformation in the fundamental structure of the same. Hence, the article asks if CEOs turn the firm into a completely different entity from what they took over, when given long tenure. The study utilizes data from the Compustat/Execucomp database from a period ranging back to 1990 till date. However, it also analyses data before 1990, as it was found that CEOs held their positions for considerably longer tenure before the introduction of SOX in 2002. That analysis gives a first-hand experience of the changes experienced by the firms in the event of CEO change. The findings indicate, that the CEOs take some time to settle themselves in and subsequently increase their bargaining power with the board. Subsequent to which CEOs, who enjoy longer tenure tweaks with the firm’s existing policies and practices.

CEO tenure and earnings management

This study examines changes in CEOs׳ incentive to manage their firms׳ reported earnings during their tenure. Earnings overstatement is greater in the early years than in the later years of CEOs׳ service, and this relation is less pronounced for firms with greater external and internal monitoring. These results suggest that new CEOs try to favorably influence the market׳s perception of their ability in their early years of service, when the market is more uncertain. Also, consistent with the horizon problem, earnings overstatement is greater in the CEOs׳ final year, but this result obtains only after controlling for earnings overstatement in their early years of service.

Executive Compensation and Regulation-Imposed Governance: Evidence from the California Nonprofit Integrity Act of 2004

ABSTRACTThis study examines the impact of the California Nonprofit Integrity Act of 2004 on CEO compensation costs in affected organizations. Contrary to the stated objective of the Act that executive compensation is “just and reasonable,” we find that CEO compensation costs for affected nonprofits during the post-regulation periods have increased by about 6.3 percent when compared with a control group of comparable unaffected nonprofits. In addition, the relative increase in CEO compensation appears to come from nonprofits that have experienced greater regulatory cost increases. We do not find evidence that the Act resulted in a change in CEO pay performance sensitivity. The observed CEO pay increase is not systematically different across nonprofits that underpaid versus those that overpaid their CEOs during pre-Act periods. Overall, this paper highlights the unintended consequences of regulatory attempts to enhance governance in the not-for-profit sector.

The effect of CEO overconfidence on turnover abnormal returns

This paper investigates the effect of managerial overconfidence on the market reaction to a CEO change within the firm. Some studies provide empirical evidence that irrational managers may engage in actions that can be detrimental to firm value while others suggest that an overconfident manager can increase firm value. We control for different turnover, governance and firm characteristics, and analyze the abnormal returns of S&P 500 firms in the event of a CEO turnover. We find that when an overconfident CEO is appointed to the firm there is a significant negative impact on firm’s stock price. Our results support the arguments against overconfident CEOs due to the possible future actions of the CEO that may decrease firm value.

Overconfidence and Aggressive Corporate Tax Policy

Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. Overconfident CEOs are more likely to overestimate the net benefits from investments in tax planning and thus avoid more tax. Consistent with this prediction we find robust evidence of a positive relation between proxies for corporate tax avoidance and CEO overconfidence. Because our empirical tests use a panel of firm-years with exogenous CEO changes and include controls for stationary firm effects, we are able to isolate the role of an idiosyncratic personality trait (overconfidence) on corporate tax outcomes, thus adding to the literatures on overconfidence and tax avoidance.

Monitoring CEOs: can insider-dominated boards do a good job?

Purpose – The purpose of this paper is to examine the monitoring effectiveness of insider-dominated boards and outsider-dominated boards on different types of CEOs. Design/methodology/approach – To test whether boards monitor inside CEOs and outside CEOs differently and to compare the sizes of the effects across board types, the paper relates CEO resignations to performance measure. The paper tests the hypotheses using logit models to estimate the probability of a CEO change. Findings – It is widely believed that only an outsider-dominated board can provide effective management oversight. The paper finds evidence supporting this view after categorized CEOs based on their affiliation with their firms upon hire. However, the paper also documents that after the Sarbanes-Oxley Act of 2002 (SOX), an insider-dominated board is just as effective as an outsider board in monitoring if the CEO was initially hired from outside of the firm. This suggests that there is no difference between insider and outsider board monitoring of outside CEOs. Therefore, after SOX, as far as board monitoring is concerned, what matters is the independence between the CEO and the firm rather than the board structure itself. Research limitations/implications – If effective board monitoring is the reason of the revised listing standards approved by Securities and Exchange Commission (SEC) in 2003 to require companies listed on NYSE or Nasdaq to have a board that is composed of a majority of independent (or outsider) directors, the paper has provided more flexibility and choices to the listed firms. For example, firms that will be better off with insider boards can choose to hire outside CEOs because monitoring effects on outside CEOs are the same regardless of board types after SOX. Originality/value – The results of this paper have interesting implication. First, the paper has shown that an outsider-dominated board is still a better monitor even after categorized CEOs based on their affiliation with their firms upon hire. Second, if effective board monitoring is the reason of the revised listing standards approved by SEC in 2003 to require companies listed on NYSE or Nasdaq to have a board that is composed of a majority of independent (or outsider) directors, the paper has provided more flexibility and choices to the listed firms. For example, firms that will be better off with insider boards can choose to hire outside CEOs because monitoring effects on outside CEOs are the same regardless of board types after SOX.

The Effect Of CEO Change On Information Asymmetry

This study investigated the relationship between CEO changes and information asymmetry. In the first year after a CEO change, management ability is evaluated in an atmosphere of high pressure and scrutiny regarding company performance. In such circumstances, CEOs selectively disclose information in an effort to inflate their performance evaluation. In addition, new CEOs influence not only management decisions, but also information disclosure strategies related to both financial and nonfinancial information. Therefore, the motivations of new CEOs regarding information disclosure can increase information asymmetry, and financial analysts must put extra effort toward reducing this asymmetry. This study measured information asymmetry by the unfaithful disclosure firm designation and analyst forecast errors. The sample is composed of firms active in the Korea Composite Stock Price Index (KOSPI) from 2006 to 2009. We found that there is a significant positive relationship between CEO change and information asymmetry as measured by unfaithful disclosure firm designation and analyst forecast errors. These results imply that CEO turnover increases information asymmetry due to managers intentional efforts to reduce the level of available information.

An Examination of Management's Regulatory Filing Choices Surrounding Restatements

ABSTRACTA restatement suggests the existence of managerial errors and internal control weaknesses within the company. Disclosures of restatements highlight ineffective management and control systems such that management might act strategically in disclosing restatement and choose less transparent options. There are, however, external forces that likely encourage management to provide more transparent restatement disclosures, despite the fact that managerial ineffectiveness will be publicized. We examine the association between company and restatement characteristics and management's restatement filing choices to provide insight into external economic forces driving the choice. We document that more transparent filing is positively associated with the materiality of the restatement, an SEC investigation, the reporting of material internal control weaknesses, and leverage, and negatively associated with a CEO change. We also find that restatements filed via 8-Ks and via 10-K/As, after the SEC rule clarification in August 2004, are associated with significantly more negative market reactions than other restatements.

CEO turnover and the reduction of price sensitivity

We examine managerial compensation and wealth sensitivities around CEO changes. The average new CEO is incentivized to increase the risk of the firm primarily because he holds significantly less stock than his predecessor, and in fact riskier policy choices are subsequently implemented. Similar results are obtained in a subsample of CEO changes that are due to retirements and deaths, which alleviates concerns about endogeneity. Our findings indicate that firms seem to be limited in their ability to mitigate the risk-averse behavior caused by large CEO shareholdings.

"Staying Agile in the Saddle: CEO Tenure, TMT Change, and Organizational Ambidexterity"

This study examines how interrelated CEO and TMT changes affect an organization’s ability to simultaneously explore and exploit. Drawing upon the upper echelons perspective, we argue for a curvilinear CEO tenure-ambidexterity relationship. We then propose that the timing of TMT change critically affects this relationship. While TMT change negatively impacts ambidexterity in the early stages of CEO tenure, it has a positive relationship to ambidexterity in the later stages of CEO tenure. We empirically test and find evidence for our arguments based on a preliminary longitudinal sample of 30 European insurance companies between 2002 and 2011. Our main contribution to the ambidexterity literature is the development of a dynamic model revealing the interrelated effects of CEO and TMT changes on firm ambidexterity.

An empirical examination of the determinant of the US financial CEOs’ compensation for the post-financial crisis period

The US financial crisis of 2008 and subsequent Global Financial Crisis were considered by many economists the worst financial crisis since the Great Depression of the 1930s. As a results, Dodd-Frank Act has passed and aims “(1) to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", (2) to protect the American taxpayer by ending bailouts, (3) to protect consumers from abusive financial services practices, and for other purposes.” The enactment of Dodd-Frank Act, in part, intended to significantly influence accountability on executive compensation especially for the financial institutions. This paper empirically investigates the changes in Financial CEOs’ compensation since the Financial Crisis of 2008. Our findings show that in the post- Financial Crisis period financial leverage is significant factor influencing the CEOs’ total compensation. In addition market based performance such as stock price and market-to-book ratio shows significant positive relationship with CEO compensation. This change can be interpreted an attempt to reduce opportunistic behavior of top executives after the financial crisis and the enactment of the Dodd-Frank Act