Big Bath Accounting in an Emerging Market: Evidence from Newly Appointed CEOs in Brazil

Abstract

This study examines the prevalence of big bath accounting in an emerging market context, focusing on newly appointed CEOs of Brazilian firms. We find evidence of big bath accounting in Brazil and extends the big bath and CEO turnover literature by documenting a limit to downward earnings manipulation and by using Brazil as a source of study. Our results suggest that incumbent CEOs have incentives to manage profits downward only when the company was previously profitable, rather than risking worsening an already bad situation, in the case of unprofitable firms. We also find that they are more likely to use accrual earnings management, rather than reducing production or increasing discretionary expenditures, as tool to decrease earnings level. Overall, our study fills a gap in the literature and supports future research in understanding the big bath CEO turnover scenario in Brazilian firms.

Keywords

• earnings management
• big bath
• ceo turnover