The attending of stakeholders and media has late been directed toward Chief Financial Officers ( CFOs ) and the function they play in making and unwraping accurate or deceitful fiscal information. While inaccurate information is non a new job for the fiscal markets, the recent media and public call over fiscal describing misbehaviour by corporate functionaries is a affair of the last old ages. As a consequence of the fiscal frauds and subsequent bankruptcy filings of several big principal & A ; # xad ; tions, stakeholders and the concern imperativeness have put inquiries about the truth and completeness of the fiscal coverage of these companies. The overall sentiment was that the duty for deceitful describing belonged non merely to the Chief Executive Officers ( CEOs ) , who have concluding inadvertence authorization for the company, but besides to the CFOs. There could be a important function of the CFO with relation to modern-day fiscal coverage, but to what extent this function existed was unknown.
In the US there has been adopted a formal demand, the Sarbanes-Oxley Act ( SOx ) , specific for this job. It holds non merely the CEO, but besides the CFO personally accountable for the truth and completeness of the fiscal information released by the company. In other words, CFOs in the US have now the same degree of duty as CEOs with respect to fiscal statements. Such statute law does n’t be here in Europe, but the same force per unit area to CFO ‘s is present. After the fiscal frauds of big European corporations, like Shell, Ahold and Parmalat, the repute of CFO ‘s has been damaged earnestly. In add-on to this fact, the reaching of the SOx in the US influenced the crisis of assurance to European CFO ‘s and consequentially SOx has been heavenly criticized in Europe. In contrast with earlier reserved looks of European directors for a similar demand in Europe, directors argue that such a ordinance is inevitable now.
Despite the fact that CFO ‘s are extremely involved in the fiscal coverage procedure, small academic research has been conducted to analyze the consequence of the CFO on a corporation ‘s reported fiscal consequences. There has been considerable research sing the consequence of new CEOs on corporate fiscal coverage and the relationship between the timing of direction actions and reported fiscal consequences, yet there has been really small probe sing the relationship between freshly appointed CFOs and reported fiscal information.
Past surveies have demonstrated that discretional accounting accumulations are the most appropriate step of the knowing influence of direction on fiscal coverage. Discretionary accumulations are believed to be capable to more reporting judgement and are more easy manipulated than nondiscretionary accumulations. If persons appointed as CFOs are in a place to significantly consequence the coverage of their company ‘s fiscal status, so a alteration in CFO forces may good take to different fiscal consequences to be reported under similar concern conditions. Consequently, in this survey I want look into the relationship between naming a new CFO and the alterations in a company ‘s reported discretional accounting accumulations environing this turnover event. My research will concentrate to the relationship in Europe, because it is still an country under treatment in Europe and up till now there is n’t reached a consensus at all. If single CFOs maintain an ability to efficaciously determine the fiscal information reported, so the exercising of this influence would be manifest in alterations in a company ‘s reported discretional accounting accumulations environing the alteration in forces. Therefore, an scrutiny of alterations in discretional accumulations around the hiring of a new CFO lends empirical grounds to the ability of the single CFOs to significantly consequence their houses ‘ reported fiscal statements.
The initial motive to put up this research came from an net incomes direction position. From this position directors could show a more favourable image to markets and maximise compensation in the signifier of fillips and wage additions tied to accomplishing fiscal marks. Bonuss and compensation contracts for company executives are frequently predicated on the prior-year ‘s fiscal or stock monetary value public presentations and give the current CFO important inducement to make corporate net income and fiscal public presentation marks in order to maximise his/her personal wealth. Further motive for this survey came from the dearth of research in this country and besides from the heightened and on-going involvement of regulators, legislators, and investors sing corporate fiscal coverage and the engagement of the CFO for the release of accurate fiscal information
1. Research Objective and Questions
The chief aim of this survey is to lend to the corporate administration and discretional accumulations literatures by measuring whether the company ‘s reported discretional accumulations are associated with the assignment of a new CFO.
This consequence will be through empirical observation tested by looking at the alterations in discretional accumulations environing the twelvemonth of CFO assignment. There will be made usage of hypotheses which will analyze the relationship between the variables act uponing the accumulations.
1.2 Research Question
The research inquiry I want to reply in this survey is as following:
- What are the effects of CFO turnover on the reported discretional accounting accumulations between 2002 and 2004 in European listed companies?
1.3 Sub Questions
- What is the sensitiveness of discretional accumulations for direction turnover?
- What are the differences between former CFOs and new CFOs with respect to coverage?
- What is the consequence of a concurrent CEO assignment on discretional accumulations?
- How much are the influences of other factors on discretional accumulations?
- What are the duties of the CFO and CEO with respect to coverage?
The fiscal system of a house contains several of import constituents, including fiscal coverage, exchequer and revenue enhancement direction, investing direction, cost direction, budgeting, capital elevation, and fiscal scheme. In big houses, these maps are split up between the accountant and the financial officer, both of whom study to the CFO. In little houses, there may non be a separate accountant or financial officer, and their several maps can both shack in the CFO ‘s office. Equally far as the fiscal coverage map is concerned, the CFO oversees readying of fiscal studies and serves as the point individual for external communicating of fiscal scheme, a function that includes conference calls with analysts.
2. Theoretical Model
2.1 Defining Net incomes Management
“ Net incomes direction is the pick by a trough of accounting policies so as to accomplish some specific aim. ” Normally, the accounting policies set out in GAAP do non necessitate specific accounting policies for directors to follow. For illustration, GAAP allows a company to take the amortisation policy that best reflects the usage of an plus ; this flexibleness allows directors to accurately reflect the gaining potency of the plus. Therefore, while the consequences of net incomes direction may non stand for the existent hard currency flows for the period, it should reflect the period ‘s grosss and disbursals. Provided that direction corsets within the ordinances of GAAP, this type of net incomes direction is allowed. Because directors have the discretion to take those accounting policies that best reflect the concern of the house, it can be assumed that directors will take those accounting policies that can set themselves and their companies in the best possible visible radiation. Particularly, directors can utilize net incomes direction for personal grounds ( for illustration, increasing current period net incomes to have a fillip ) and directors can utilize net incomes direction to act upon the market value of the company ( for illustration, claiming less amortisation disbursal in order to increase net income for that period ) .
Net incomes direction can assist houses pass on insider information to the populace, but fiscal statement users need to understand net incomes direction in order to do good usage of direction prepared fiscal statements. A house ‘s pick of accounting policies signals to the public whatever future outlooks the house may hold. For illustration, a house altering from straight-line to duplicate worsening amortisation signals to the populace that the gaining potency of the plus lies more in its earlier old ages of usage.
There are two cardinal types of net incomes direction: seting single accounting policies and utilizing different accrual methods. In bend, these two methods can be used to either addition or diminish a house ‘s current net incomes. First, directors can set any figure of accounting policies to impact the value of a house. Common accounting policy alterations can include seting amortization disbursal or gross acknowledgment methods. Second, directors can put up different accumulations to distribute gross and expense acknowledgment over several periods. For illustration, a building company receiving gross up forepart for a 10-year undertaking can accrue gross over the period to fit expenses.There is a bound to the benefits of net incomes direction. While responsible net incomes direction allows a house to pass on insider information to fiscal statement users, mistreating net incomes direction can cut down the long-run dependability of the fiscal statements. Net incomes direction should assist fiscal statement users understand the net incomes of the company. Directors must retrieve that net incomes direction has no hard currency flow consequence ; all accumulations will finally hold to be reversed.
2.2 Motivations for Earnings Management
There can be a strong motive for directors to play with net incomes figures since fillips are frequently based on the terminal consequence. Directors may be tempted to increase the net incomes figure since their fillips may be a direct consequence of this sum. On the other manus, a director may be willing to “ take a bath ” in a twelvemonth where net income is expected to be low since they will non make the net incomes figure required to have a fillip. Healy ( 1985 ) noted that a cap and bogy is frequently applied when fillips are determined. The bogy is the minimal net income figure required for the director to have a fillip ; the cap is the maximal net income figure for which a fillip will be paid out. Therefore, directors recognizing that they will non be able to make the targeted minimal net income figure may be tempted to “ take a bath ” . Besides, if income were well higher than the cap, the director would be willing to absorb extra losingss since the sum of their fillip will non be affected. Ultimately, directors who take losingss in the current twelvemonth to cut down net income below the cap will put the house in a better place to execute good in future old ages.
As discussed by Sweeney ( 1994 ) , directors may utilize net incomes direction when involved in contractual understandings. Many contractual understandings within the corporation bend around the debt compact hypothesis. This hypothesis implies that loaners to the corporation may include demands in the debt contracts that net income, the current ratio, the debt to equity ratio, and dividend policies must non alter or fall below a certain degree. Since the costs of go againsting a debt compact can be highly high, a director ‘s involvements lie in maintaining the corporation at a degree that does non set the contractual understanding at hazard. In order to make so, the director could utilize net incomes direction to make the semblance that the company has non violated the debt compact.
A 3rd ground for net incomes direction stems from political motives. Many industries in the economic system operate under a monopoly or an oligopoly. Firms in these industries may be tempted to utilize net incomes direction to diminish net income because net incomes that are excessively high may motivate a public call for authorities intercession in the industry. Minimizing net income allows the industries to go on operations without authorities intervention. ( Jones 1991 ) found grounds of “ income smoothing ” , particularly in old ages where houses are under authorities probe.
The 4th ground for net incomes direction is to take advantage of revenue enhancement policies. The director of a corporation may be willing to pull off net incomes to diminish net income, which will in bend lessening revenue enhancements collectible. The determination to utilize LIFO or FIFO provides US houses with the biggest chance for revenue enhancement nest eggs. Dopuch and Pincus ( 1988 ) noted that it is common for US companies to utilize LIFO alternatively of FIFO because they can describe lower net income in periods of increasing monetary values.
A 5th ground why corporations may wish to pattern net incomes direction occurs when there is a alteration in CEOs. As discussed by DeAngelo et Al. ( 1994 ) , new CEOs may be tempted to “ take a bath ” on net incomes in the first twelvemonth and fault the consequences on the anterior CEO. Besides, CEOs approaching retirement will be more willing to increase net incomes now so that their fillip will be higher at the clip of retirement.
A 6th ground for net incomes direction occurs when a house is sing an Initial Public Offering ( IPO ) . Firms will be tempted to describe higher income in the old ages predating the offering so that they will have a higher command for their IPO. ( Clarkson, Dontoh, Richardson, and Shefix 1992 ) noted that “ the market responds positively to net incomes prognosiss and this can be a step of the house ‘s value ” .
As antecedently mentioned, directors can besides take part in net incomes direction to pass on insider information to investors. This theory implies that a house ‘s accounting policies may uncover insider information to investors, in bend assisting investors evaluate the house and do utile determinations sing the house ‘s profitableness.
2.3 Positive Accounting Theory
Positive accounting theory is the anticipation of the accounting picks that houses make and the consequence that changes in accounting policy will hold on specific houses. These alterations affect different houses otherwise and this is one of the chief focal points of positive accounting theory ( PAT ) . When doing anticipations, PAT assumes that all houses organize their accounting policies to do the house as efficient and effectual as possible while remaining within the guidelines of the regulating organic structures.
A house can be seen as transporting on its concern through a assortment of contracts through its employees, providers, and clients. These contracts involve accounting information that changes with different accounting policies that are put into topographic point ; the end of the policies is to maximise the house ‘s possible and minimize contract costs. The option of different accounting policies is supposed to give up timeserving behaviour. PAT assumes this is what will go on because directors are rational and will be to function their best involvements.
The best possible set of accounting policies for a house will be a trade off between accounting policies to minimise catching costs and giving directors the power to alter accounting policies in the visible radiation of altering market conditions. PAT does non seek to state people, houses, or directors what they should make ; normative theories try to make this.
Positive accounting theory is organized around three hypotheses:
- The Bonus Plan Hypothesis: All other things staying equal, directors will seek to pull strings accounting policies so that future net incomes are shifted into the current period. The footing for this is that a director ‘s public-service corporation will be maximized by traveling his/her fillip watercourse from the hereafter to the present and this is done through the increasing of current reported net incomes.
- The Debt Covenant Hypothesis: All other things staying equal, the closer a steadfast gets to jobs where their debt is concerned, accounting policies will be used to increase current net incomes and hence detaining things such as negative imperativeness and force per unit area from creditors in the signifier of increased involvement rates and run intoing to reexamine the province of the house.
- The Political Cost Hypothesis: All other things being equal, the greater the cost of industry revenue enhancements, income revenue enhancements and intangible costs such as keeping a high degree safety plan ; directors will seek to reassign current net incomes to future periods to postpone these costs.
When all of these hypotheses are combine it shows that smaller and big houses every bit good as profitable and non-profitable houses will take accounting policies otherwise to maximise the efficiency of the house and to minimise its costs – both fiscal and non-financial. An illustration of this would be a house with high net incomes seeking to utilize accounting constabularies to take down its nonexempt income but if the house ‘s director operated on a fillip program the company may be skewed towards describing a higher income for the current period.
During this survey the rules of the positive accounting theory will be taken into consideration and besides consequences will be analyzed within this position.
2.4 Prior Research
The pattern of corporate accounting and coverage has received considerable attending in the academic literature ( Bartov et al. 2002 ; Matsumoto 2002 ; Pincus and Rajgopal 2002 ) . Investors, regulators, audit commissions, and external hearers are all concerned with persons and companies trying to pull off net incomes by pull stringsing degrees of reported accounting accumulations ( Bartov and Mohanran 2004 ; Dechow et al. 1996 ; Levitt 1998, 2000 ) . This concern has given rise to a considerable sum of research into the quality of corporate net incomes and the being of net incomes direction through the usage of accounting accumulations. Prior research has examined the relationship between fiscal statement uses and assorted company features, audit house features, boards of managers and audit commission features, and CEO actions and features.
Sing my research, past surveies sing alterations in company ‘s fiscal consequences right after CEO assignments are relevant. Several research workers have found that new CEOs are more likely to cut down reported income consequences in their initial twelvemonth ( the large bath ) than companies non engaging a new CEO. However, while a batch has been investigated on CEO assignments, there has been a really small probe on alterations in company ‘s fiscal consequences environing CFO assignments.
The first wide probe of CFO assignments is the survey of Mian ( 2001 ) . He investigated features of the CFO hiring company, where the new CFOs came from and where the former CFOs went in the corporate executive turnover procedure. He concluded that CFO turnover is frequently punitory since it ‘s on a regular basis preceded by hapless stock monetary value and runing income perform & A ; # xad ; ance, and is besides preceded by high CEO turnover. However, his survey focused on the ground for CFO turnover and where these persons came from and went to, and did non analyse the consequence of CFO turnover on the company ‘s fiscal consequences.
More recent surveies in accounting have assessed the impact of engaging a new CFO on degrees of reported accumulations. Menon and Williams ( 2004 ) , Dowdell and Krishnan ( 2004 ) , and Geiger et Al. ( 2005 ) analyze the impact of a company engaging an single straight from its external audit house, which is now restricted under the Sarbanes-Oxley Act in the US. The Menon and Williams ( 2004 ) survey examines companies that have appointed former spouses of their external audit ( revolving-door pattern ) house to corporate officer places like CFO, Controller, etc. The focal point of their research is on the consequence of former audit-firm-related spouses on a company ‘s reported fiscal consequences. They investigate a sub sample of companies naming persons from their CPA house into CFO and similar fiscal coverage inadvertence places and happen that discretional accounting accumulations are significantly higher for these houses than for their control samples.
Dowdell and Krishnan ( 2004 ) and Geiger et Al. ( 2005 ) have studied the revolving-door pattern more straight. Dowdell and Krishnan ( 2004 ) examine appoint & A ; # xad ; ments to CFO places, and include persons at all ranks at their former audit house. Geiger et Al. ( 2005 ) examine merely former directors and spouses of CPA houses, but include assignments to other fiscal describing places such as Controller, VP-Finance, etc. Dowdell and Krishnan ( 2004 ) conclude that degrees of discretional accumulations are higher for former audit forces that late joined their publically traded clients. On the contrary, Geiger et Al. ( 2005 ) found no differences between their experimental sample of revolving-door hiring houses and control samples of non-revolving-door hiring houses with regard to alterations in the non-operating accumulations. These surveies have taken different attacks to analyze fiscal coverage environing the revolving-door pattern and have reached different decisions.
Furthermore, senior direction turnover at houses that are financially distressed has been investigated by Gilson ( 1989 ) . He found that in any given twelvemonth, 52 % of the houses experience turnover in senior direction. In houses that are highly unprofitable, but non in fiscal hurt, the rate of turnover is merely 19 % . This determination is of import because Moore ( 1973 ) and DeAngelo ( 1988 ) found that new directors have a inclination to compose down and compose off assets and increase commissariats for future costs or losingss ( large bath by diminishing accumulations ) . The inducement to diminish accumulations is that low net incomes can be blamed on anterior direction. Because of this, an improved net incomes tendency can be reported in subsequent old ages. Therefore, the effect of a direction alteration is expected to be an net incomes lessening by diminishing accumulations.
2.5 Changes in Discretionary Accruals and CFO Turnover
As described before, net incomes direction can be achieved by assorted agencies such as managing of accumulations, alterations in accounting methods, and alterations in capital construction. Other options are clocking of acceptance of new accounting criterions or capitalising operating disbursals as happened at Worldcom. In comparing to alterations in accounting methods, accrual use is a less dearly-won agencies of reassigning net incomes between periods. Since the cost of pull stringsing accumulations is less compared to other methods, net incomes use by accumulations is expected to be more preferred by direction.
This survey will concentrate on accumulations as the beginning of net incomes direction. In accounting, accrual describes the accounting method known as accrual footing, whereby grosss and disbursals are recognized when they are accrued, i.e. accumulated ( earned or incurred ) , irrespective when the existent hard currency is received or paid out. Under GAAP regulations, if a hereafter liability ‘s timing and sum are known today, an accrual should be made to reflect that liability. The academic literature has made a differentiation between nondiscretionary ( normal ) and discretional accumulations. While the first 1s include those accumulations intended to better the information content of net incomes study, the discretional accumulations are those related to directors ‘ concern in their ain involvements. Examples of direction picks reflected in accumulations are estimations of bad debt disbursal, estimations of stock list obsolescence, and timing of gross revenues. Nondiscretionary accumulations are the expected or normal degree of accumulations for a company, based on factors such as type of operating industry, company size, and gross growing. Discretionary accumulations are the unexpected constituents reported by the company and are the difference between existent degrees reported and the degree expected to be reported by the company for the period. In other words, discretional accumulations are subjective accumulations, which are dependent on the judgement of the direction. The direction uses its ain discretion in make up one’s minding whether or non to make those accumulations.
Discretionary accumulations of houses with traveling concern makings are expected to be negative because of direction ‘s operating determinations. In an attempt to better hard currency flow, directors of such houses may take actions to speed up aggregation of receivables ( taking to a lower balance in receivables and a lessening in accumulations ) . Directors may besides detain purchases of stock list ( taking to a lower balance in stock list and a lessening in accumulations ) and delay payment of payables ( taking to a higher balance in payables and a lessening in accumulations ) ( DeFond and Jiambalvo 1994 ) . To be clear, in this survey an increase/decrease of discretional accumulations corresponds with respectively increase/decrease of net incomes.
Previous research workers have besides argued that the degree of these discretional accumulations reported by the company is a contemplation of direction ‘s usage of the “ fiscal coverage discretion ” inherent in GAAP to either in & A ; # xad ; fold or lessening reported net income. In a survey of whether houses used net incomes direction to beef up their claims of injury from foreign imports, used the alteration in grosss and the fixed plus balance to foretell nondiscretionary accumulations. Specifically, she assumes that gross revenues and fixed assets are non managed and that they well determine the part of accumulations least under direction ‘s influence. The difference between entire accumulations and the sum of accumulations predicted by a arrested development of accumulations on gross revenues and fixed assets ( the arrested development remainder ) is the step of discretional accumulations. It is the part of entire accumulations non explained by external economic factors. Discretionary accumulations are believed to be capable to more reporting judgement and are more easy manipulated than nondiscretionary accumulations. And if executives can significantly impact the reported fiscal consequences of their houses, so you would see that influence in alterations in the degrees of discretional accumulations reported by companies environing an executive assignment.
I will analyze, consistent with earlier research workers, discretional accumulations. They have argued that companies are seldom booking accumulations to cut down net incomes, so analyzing discretional accumulations is the most appropriate step of the knowing influence of direction on fiscal coverage. Further, Becker et Al. ( 1998 ) , DeFond and Park ( 2001 ) , and Ashbaugh et Al. ( 2003 ) besides note that current discretional accumulations should be the focal point of accumulations research in that current accumulations are where direction has the most immediate coverage discretion to pull strings reported fiscal consequences. Therefore, if directors want to act upon the house ‘s reported consequences, so the consequence would be most seeable in the alterations in degrees of current discretional accumulations.
Murphy and Zimmerman ( 1993 ) place three possible accounts for the association between fiscal public presentation and CEO turnover. First is the ”horizon ” issue where CEOs who are nearing a known, planned going day of the month seek to increase current period net incomes at the disbursal of future net incomes. Second is the ”big bath ” theory proposing that incoming CEOs may take the chance to compose off certain capitalized costs during their passage twelvemonth so as to positively act upon net incomes in future periods. Third is the ”cover-up ” theory, where CEOs of ill performing houses seek to increase net incomes in order to avoid threatened expiration. This cover-up theory is consistent with the ”opportunism ” position of Pourciau ( 1993 ) . I believe that the cover-up theory and managerial signaling provide sensible accounts of managerial behaviour prior to the CEO turnover. However, Pourciau ‘s ( 1993 ) and Murphy and Zimmerman ‘s ( 1993 ) empirical consequences do non back up these accounts. In order to efficaciously measure net incomes direction associated with CEO alteration it is necessary to see the situation-specific factors that potentially provide inducements and chances for CEOs to pull strings net incomes.
Large bath accounting has been used to depict big net income cut downing write-downs or ‘income-decreasing discretional accumulations ‘ in net income and loss statements ( Healy, 1985 ; Watts and Zimmerman, 1986 ; Weberman, 1986 ; Greene, 1986 ; and DeAngelo, 1988 ) . Since a batch has been investigated on CEO assignments, there has been a really small probe on alterations in company ‘s fiscal consequences environing CFO assignments. This survey will take on CFO assignments and its impact on discretional accumulations by comparing the one-year consequences before and after the assignment.
2.6 Hypothesiss and Conceptual Framework
As found in anterior research on audit accommodations a current CFO, on norm, has inducements to increase discretional accumulations in order to show a more favourable image to the markets and to maximise compensation in the signifier of fillips and wage additions tied to accomplishing fiscal marks. Bonuss and compensation contracts for company executives are frequently pred & amp ; # xad ; icated on the prior-year ‘s fiscal or stock monetary value public presentations and give the current CFO important inducement to make corporate net income and fiscal public presentation marks in order to maximise his/her personal wealth.
An extra inducement for CFOs to increase discretional accumulations degrees is to seek to keep their employment with the house. Mian ( 2001 ) concludes that CFO turnover is frequently punitive-resulting from hapless prior reported fiscal statement income degrees or below mean stock monetary value public presentation. Thus, I believe there is considerable inducement for current CFOs to describe positive fiscal consequences and to utilize discretional accumulations to recognize it.
On the other manus, new CFOs may hold inducements to cut down discretional accumulations. The extant research on the assignment of a new CEO and alterations in reported fiscal consequences clearly demonstrates that companies naming new CEOs are more likely to cut down reported income in their initial old ages of the CEO than similar companies non engaging a new CEO. Reporting low income degrees in the early old ages of employment with a new company enables executives to demo more significant fiscal coverage better & amp ; # xad ; ments over their term of office than if the initial fiscal consequences were stronger. I expect that CFOs would keep similar describing inducements as CEOs in this regard and tend to cut down reported degrees of income upon their reaching at their new house in order to demo more positive fiscal consequences in the periods under their term of office.
An of import issue to see is the fact that the current CEO has to allow the new CFO to diminish discretional accumulations since the fillip of the current Chief executive officer can be influenced accordingly. I propose that the new CFO will hold the chance to front-running in contrast with the current CEO. The CFO will be prior to the CEO in the determination procedure with sing to the one-year histories ; this will give the CFO the chance to show an appropriate visual aspect of the discretional accumulations for himself. He can show it in a manner which will forestall the CEO to go cognizant of the accommodation done. Obviously on the contrary exceeding instances can happen, but I do n’t anticipate this will hold a important consequence on my proposition.
I expect that the combined consequence of these inducements would be that companies engaging new CFOs would describe important decreases in the degree of discretional accumulations in the twelvemonth during and after the assignment. Therefore, the first hypothesis in my survey is:
H1: Companies that appoint a new CFO study important decreases in discretional accumulations compared to other non-hiring houses
My 2nd and 3rd hypotheses address differences in discretional accumulations alterations ensuing from new CEOs coming from different beginnings. Parrino ( 1997 ) finds grounds that the beginning of the new CEO is associated with differences in company fiscal public presentation after the new CEO takes over. Specifically, he finds significantly greater alterations in reported fiscal public presentation instantly after a new CEO takes over who was hired externally every bit compared to an internal CEO assignment.
In the scrutiny of alterations in discretional accumulations environing a CFO appoint & A ; # xad ; ment, I besides expect that advancing or naming an person from within the company would ensue in smaller alterations in fiscal coverage than engaging a new CFO from outside the company. CFOs fall ining the company for the first clip are expected to convey different position into the company ‘s fiscal coverage issues. They besides have to turn out themselves more than internally promoted CFOs, since they have to construct up more assurance in their map in their first old ages. These differences would besides be seeable in the reported accumulations after the assignment of the new CFO. Accordingly, I will analyze if similar engaging beginning differences may be with CFO assignments and if there is a beef uping consequence with a concurrent CEO assignment. Therefore, my 2nd and 3rd hypotheses in my survey are:
H2: The consequence of CFO turnover on accounting accumulations will be stronger with a coincident CEO alteration.
H3: Companies engaging external persons as new CFOs exhibit greater decreases in discretional accumulations compared to companies naming internal persons.
In the theoretical model, the general literature on fiscal policies has been discussed. The decision has been drawn that there has been much research completed on this topic and that the presence of net incomes direction has been proven. It ‘s obvious that there are adequate possibilities to unwrap subjective fiscal consequences.
3.1 Research method
The research method employed in this research is the archival method, by which bing corporate information has been collected and observed to reply the research inquiries. Within this design a combination of informations aggregation from corporate promotion and fiscal databases has been used. The pick for the archival method comes from its nonreactive ( unnoticeable ) character, i.e. when archival information was recorded there was no cognition that it would be used for research.
3.2 Data Collection
To place freshly appointed CFOs a full hunt of the Dow Jones Interactive database ( in Factiva ) has been conducted for the keywords “ CFO ” and “ Chief Fiscal Officer ” in the period 2002-2004. 150 companies has been selected in the sample set ( 50 per twelvemonth ) . For each company the information has been collected for three subsequent old ages, the twelvemonth before the CFO alteration ( t-1 ) ; the twelvemonth of the CFO alteration ( T ) ; and the twelvemonth following the CFO alteration ( t+1 ) . To obtain the needed fiscal informations to cipher the discretional accumulations, the hunt has been confined to the listed houses in the United States. Merely companies who were listed in NYSE, NASDAQ and AMEX have been recorded in the sample set. During the designation of the publications for new CFO appoint & A ; # xad ; ments, coincident record has been kept of CEO assignments in those companies who are hired in the same twelvemonth of the CFO assignment. Additionally, in the same line with earlier discretional accumulations surveies, fiscal services and public-service corporations industry houses have been excluded, since they are capable to industry-specific ordinances. The trial sample of companies engaging a new CFO consists merely of those instances where the person ‘s background prior to assignment was unambiguous.
3.3 Data analysis
In the academic literature, there are two well-known attacks to cipher discretional accumulations: the cross-sectional theoretical account and the time-series theoretical account. In the cross-sectional theoretical account, discretional accumulations are calculated by regressing accrual informations from several houses in the same industry for one clip period. In the time-series theoretical account, the computation is performed by regressing accrual informations from the same house across several clip periods. In this research, the cross-sectional theoretical account ( Jones 1991 ) will be applied to cipher discretional accumulations. The motive comes from the fact that the time-series theoretical account will supply perchance less valid statistical consequences compared to the cross-sectional theoretical account. This possibility is due to dearth of observations in the appraisal period to obtain dependable parametric quantity estimations for a additive arrested development. Many surveies ( DeFond and Jiambalvo, 1994 ; Becker et al. , 1998 ; and DeFond and Subramanyam, 1998 ) adopted the cross-sectional attack as it allows analysis of the full sample and therefore overcomes the survivorship prejudice job in the time-series opposite number.
The procedure of finding of discretional accumulations begins with the computation of entire accumulations ( TAC ) , which is defined as the difference between net incomes and hard currency flows from operations, i.a. the alteration in current assets ( CA ) excepting hard currency ( CASH ) minus the alteration in current liabilities ( CL ) excepting the current part of long-run debt ( CPLTD ) , minus depreciation and amortisation ( DEPR ) , scaled by lagged entire assets ( TA ) for house I at twelvemonth T:
T AC I, T = ( a?†CA I, t – a?†CL I, t – a?†C ASH I, T + a?† CPLTD I, t – DEPR I, T ) / T A I, t-1
With mention to Compustat,
TAC = ( a?† Data4 – a?† Data1 – a?† Data5 + a?† Data34 – Data14 ) / lagged Data6
Since net incomes direction involves the transportation of net incomes from one period to another, the |TACi, t| step of accumulations steps the entire sum of net incomes transportation without being sensitive to the precise timing of when net incomes are increased or decreased.
Subsequently the nondiscretionary portion of TAC is estimated utilizing the modified cross-sectional theoretical account. The appraisal will be performed by regressing the difference between the alteration in gross revenues and histories receivable ( both lagged by entire assets ) :
TAC I, t /TA I, t-1 = ? + ? 1 ( 1/ TA I, t-1 ) + ? 2 ( a?† SALES I, t – a?† AR I, T ) / TA I, t-1 + ? I
where TAC is entire accurals, TA is entire assets, a?†SALES is alteration in gross revenues and a?†AR is change in histories receivable for all houses in industry I at twelvemonth t. Use of lagged assets as the deflator is intended to extenuate heteroskedasticity in remainders. The theoretical account is estimated cross-sectionally for all steadfast observations in an industry ( by SIC codification ) for each twelvemonth.
After appraisal of ? , ? 1 and ? 2 for each industry, these cross-sectional coefficients are applied in the below mentioned theoretical account to a specific house ‘s informations to gauge the single house ‘s nondiscretionary accumulations ( NDA ) for the period.
NDA I, t /TA I, t-1 = ? + ? 1 ( 1/ TA I, t-1 ) + ? 2 ( a?† SALES I, t – a?† AR I, T ) / TA I, t-1 + ? I
This step of nondiscretionary accumulations implies a degree of discretional accumulations:
DA I, T = TAC I, t – NDA I, T
Discretionary accumulations ( DA ) are entire accumulations ( TAC ) minus nondiscretionary accumulations ( NDA ) . The consequences will be compared to houses who did n’t name a CFO in those old ages. After this comparing the possible association between CFO alteration and discretional accumulations can be evidenced.
In this chapter, the consequences will be discussed which are obtained from the trials utilizing SPSS. A complete overview of all informations and consequences of the trials can be found in Appendix X. The consequences will be presented harmonizing to the construction of my research and the hypotheses will accepted or rejected consequently. First of wholly, the descriptive consequences will be discussed.
4.1 Descriptive consequences
In this subdivision the descriptive statistics will be discussed. First the industry distribution will be explained, with twelvemonth by twelvemonth comparing for each separate class of industries. Afterwards, an analysis of the beginning of CFO turnover will be performed by comparing internally and externally hired CFOs. Finally, the descriptive analyse of the discretional accumulations will shut this paragraph.
The bulk of the CFO turnover occured in fabrication and services houses ( severally around 45 % and 30 % ) . These industries have possible higher executive turnover rates compared to other industries, due to higher executive fight within those industries. The distribution of the CFOHIRE companies across the three old ages is 37 ( 31,9 % ) in 2002, 42 ( 36,2 % ) in 2003 and 37 ( 31,9 % ) in 2004. Of class, there are little fluctuations within industries from twelvemonth to twelvemonth, nevertheless these are instead fringy than extremist. The biggest fluctuation is the addition of CFO turnover within fabrication houses in 2002. However, the decision can be drawn that there is non a important disproportionate industry bunch.
4.2 Statistical consequences
Consistent with anterior research, the cross-sectional version of the Jones theoretical account has been used to cipher discretional accumulations.