CEO tenure and earnings management

- Earnings overstatement is greater in the early than in later years of CEOs׳ service.
- This association is less pronounced for firms with greater monitoring.
- Market is uncertain about CEOs׳ ability in their early years of service.
- CEOs try to influence market׳s perception of their ability by overstating earnings.

This study examines changes in CEOs׳ incentive to manage their firms׳ reported earnings during their tenure. Earnings overstatement is greater in the early years than in the later years of CEOs׳ service, and this relation is less pronounced for firms with greater external and internal monitoring. These results suggest that new CEOs try to favorably influence the market׳s perception of their ability in their early years of service, when the market is more uncertain. Also, consistent with the horizon problem, earnings overstatement is greater in the CEOs׳ final year, but this result obtains only after controlling for earnings overstatement in their early years of service.