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Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers

Published online by Cambridge University Press:  28 August 2018

Aloke (Al) Ghosh  and
Jun Wang
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Abstract

We study the effects of accounting losses on chief executive officer (CEO) turnover. If accounting losses provide incremental information about managerial ability, boards can utilize the information in losses to assess CEOs’ stewardship of assets, which is why losses may serve as a heuristic for managerial failure. We find a positive relation between losses and subsequent CEO turnover after controlling for other accounting and stock-performance measures. We also find that losses are associated with an increase in board activity and that losses predict poor operating performance and future financial problems. Our results explain why CEOs manage earnings to avoid losses.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 877 - 906
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jarrad Harford (the editor) and an anonymous referee for their detailed and instructive comments. We also benefited from our discussions with Ray Ball, Sasson Bar-Yosef, Sudipta Basu, Jeremy Bertomeu, Scott Bronson, Ting Chen, John Elliott, Sonali Hazarika, Chris Hogan, Armen Hovakimian, Peter Joos, Yinghua Li, Antonio Marra, Christina Mashruwala, Pietro Mazzola, Steve Monahan, Serena Morricone, Daniel Oyon, Annalisa Prencipe, Shiva Rajgopal, Bill Ruland, and participants at the 2011 American Accounting Association annual meeting in Denver, Bocconi University, Copenhagen Business School, Cambridge University, INSEAD (Paris), University of Lausanne (UNIL), Temple University, and Yonsei University. Our special thanks to Masako Darrough, Val Dimitrov, Carol Marquardt, and Terry Shevlin for their many comments and suggestions on some of our prior versions.

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