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Jurnal

Journal of Banking and Finance

Keyword

• CEO turnover; • Earnings management; • Big bath accounting; • Discretionary expenses; • Financial institutions

Pengarang

  1. S. Bornemann
  2. T. Kick
  3. A. Pfingsten
  4. A. Schertler

    Subject

    1. BANKING
    2. FINANCE

      [Abstrak]

      Existing research documents that incoming CEOs in non-financial firms tend to take an “earnings bath”. They reduce their first year’s profits through discretionaryexpenses, blame the “bad outcome” on their predecessors, lower the performance benchmark, and save income for subsequent accounting periods. Identifying such an earnings bath for incoming CEOs in banks requires us to disentangle under-provisioning, which may have triggered the turnover event, and the earnings bath. For a sample of German savings banks over the period 1993–2012, we find that incoming CEOs increase discretionary expenses and that this increase is stronger for incoming CEOs from outside the bank than for insiders. We further show that CEOs coming from outside increase discretionary expenses during their first year in charge even if the default risk of the bank is low and the stock of risk provisions relative to risk exposure is high. Therefore, we conclude that the effects are only partially driven by incoming CEOs who rectify discretionary expenses by insufficient existing risk provisions, and that big bath accounting plays an important role in explaining discretionary expenses during CEO turnovers.

      Periode

      Vol 53, Tahun 2015

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