Earnings and Impression Management in Financial Reports: The Case of CEO Changes

29 Pages Posted: 14 Aug 2003

See all articles by Jayne M. Godfrey

Jayne M. Godfrey

University of Auckland

Paul R. Mather

La Trobe University

Alan L. Ramsay

Monash University - Department of Accounting

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Abstract

This article examines earnings management, as well as the presentational format of graphs (impression management) in the financial reports of sixty-three Australian listed public companies that changed chief executive officers (CEOs). Prior U.S. evidence generally suggests downward earnings management in the year of senior management changes and upward earnings management in the following year (Pourciau, 1993). We argue that new managers not only have incentives to manage earnings but also have similar incentives to manipulate the impressions created by graphs in financial reports. Examining earnings and impression management at the same time also provides an opportunity to distinguish between alternative explanations for any observed earnings management. In the year of CEO change, we hypothesize and find evidence of downward earnings management and some limited evidence of unfavourable impression management of the key financial variables (KFVs) graphed. As posited, we find evidence of upward earnings management and some evidence of favourable impression management in the year after a CEO change. These results are strongest for the subsample in which the CEO change was prompted by a resignation rather than a retirement.

JEL Classification: G23, M41, M43, M45, M47

Suggested Citation

Godfrey, Jayne M. and Mather, Paul R. and Ramsay, Alan, Earnings and Impression Management in Financial Reports: The Case of CEO Changes. Available at SSRN: https://ssrn.com/abstract=408286

Jayne M. Godfrey (Contact Author)

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Paul R. Mather

La Trobe University ( email )

School of Accounting
Bundoora
Melbourne, Victoria 3086
Australia
+61-3-9479-5264 (Phone)

Alan Ramsay

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

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