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Journal of Management and Governance

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01-03-2007

The influence of executive age, career horizon and incentives on pre-turnover earnings management

Authors: Wallace N. Davidson III, Biao Xie, Weihong Xu, Yixi Ning

Published in: Journal of Management and Governance | Issue 1/2007

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Abstract

In this paper we hypothesize that CEOs will be motivated to manage earnings prior to a turnover decision. This motivation comes from the horizon problem for CEOs nearing retirement age and for CEOs whose profit-based bonus is a large portion of their total compensation. We find that firms in which CEOs are nearing retirement age have large discretionary accruals in the year prior to turnover. Although we find firms with a larger proportion of profit-based bonus pay have larger discretionary accruals, this result is not robust with the inclusion of control variables in the regressions.

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We use age 62 because this is the youngest age that a CEO would qualify for Social Security. However, we obtain qualitatively similar results using age 60 and also age 65 as the cutoff.

It may be that the bonus variable interacts with CEO age. To test this we computed a binary variable that takes the value of 1 when bonus is greater than the median (19%) of total compensation. We then multiplied this variable with the CEO age variable to obtain interaction terms. In regressions (not shown in the table) the estimated coefficients for the interaction term was insignificant while the estimated coefficient for CEO age remains significant.

The effect on retirement income may be greater for defined benefit plans than for defined contribution plans because the former is generally determined, in part, by the retiree’s pay in the last few years of employment.

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Title: The influence of executive age, career horizon and incentives on pre-turnover earnings management
Authors: Wallace N. Davidson III
Biao Xie
Weihong Xu
Yixi Ning
Publication date: 01-03-2007
Publisher: Kluwer Academic Publishers-Plenum Publishers
Published in: Journal of Management and Governance / Issue 1/2007
Print ISSN: 1385-3457
Electronic ISSN: 1572-963X
DOI: https://doi.org/10.1007/s10997-007-9015-8

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