Earnings And Impressions Management In Financial Reports: The Case Of CEO Changes

This paper examines earnings management, as well as the presentational format of graphs (impression management) in the financial reports of Australian listed public companies changing chief executive officers (CEOs). Prior US evidence suggests downward earnings management in the year of senior management changes and upward 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 engage in impression management by manipulating the impressions created by graphs in financial reports. Examining both earnings and impression management simultaneously facilitates the possibility of distinguishing between between management opportunism and attempts to reflect underlying economic performance as explanations for any observed earnings management. In the year of CEO change, we hypothesise and find evidence of downward earnings management but no evidence of any unfavourable impression management of the key financial variables (KFVs) graphed. As posited, we find evidence of upward earnings management and favourable impression management in the year after a CEO change. These results are strongest for the sub-sample where the CEO change was due to a resignation rather than a retirement. To our knowledge, this is the first study to link the earnings and impression management literature and is also the first study to examine impression management in the context of CEO change. Accordingly, it contributes to the literature exploring context-specific incentives for earnings management, impression management and the role of accounting in corporate contracting.