New chief executive officers’ earnings forecasts bias at their first year term and role of financial analysts: Korean evidence

Abstract

This study investigates newly appointed Chief Executive Officers (CEOs)’ earnings forecasts bias at their first year term using listed firm data in Korea. Prior literature reports that new CEOs prefer to report low earnings (big bath or cookie jar accounting) at their first year term for the purpose of income smoothing. However, it is hard to find the studies about new CEOs’ earnings forecasts bias at the term of low earnings reporting incentive. We question what earnings forecasts bias they usually have when they are interested in low earnings reporting. From the empirical tests, we find that newly appointed CEOs tend to provide conservative (negative) forecasts instead of optimistic (positive) forecasts at their first term. Furthermore, we find that greater analyst following helps to relieve the negatively biased earnings forecasts of new CEOs. This study will contribute to academics and disclosure-related practitioners by documenting about newly appointed CEOs’ earnings forecasts bias. We also believe that our empirical evidence will be helpful to market participants when they make a business decisions in case of CEO turnover.