CEO Turnover and Earnings Management in Banks: Evidence Using Age-Based Retirement Policies

Sarkar, A and Tantri, P L and Subramanian, K (2013) CEO Turnover and Earnings Management in Banks: Evidence Using Age-Based Retirement Policies. Working Paper. Indian School of Business. (Unpublished)

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Abstract

We examine the effect of CEO turnover on earnings management in banks. Since banking is intrinsically an opaque activity, we hypothesize that an incoming CEO of a bank is more likely to manage earnings than a counterpart in a non financial firm. To identify the hypothesized effects, we exploit exogenous variation generated by age-based CEO retirement policies in Indian public sector firms. Compared to banks where there is no turnover, banks experiencing CEO turnover report 23% lower profit-to-sales and 25% lower return-on-assets in the transition quarter. This decrease occurs due to increased provisions, though such provisions do not associate with increased non-performing assets subsequently. Shorter CEO tenure exacerbates earnings management by the incoming CEO. The stock price declines by 1%, and lending is 2% lower than average, which highlight the real effects of earnings management by incoming CEOs. In contrast to banks, we observe no earnings management coinciding with CEO turnover for other public sector firms. As evidence of motivation, we show that earnings management increases the likelihood of directorship positions in other firms within two years of retirement.

Affiliation: Indian School of Business
ISB Creiators:
ISB Creators
ORCiD
Sarkar, A
UNSPECIFIED
Tantri, P L
UNSPECIFIED
Subramanian, K
UNSPECIFIED
Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Banks, CEO, CEO turnover, Earnings Management, Financial Crisis, Public Sector Banks, Retirement, Superannuation, Tenure
Subjects: Finance
Depositing User: Ilayaraja M
Date Deposited: 08 Jun 2019 18:45
Last Modified: 09 Jun 2019 19:13
URI: http://eprints.exchange.isb.edu/id/eprint/1042
Publisher URL: http://dx.doi.org/10.2139/ssrn.2338392
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