Does the CEO manipulate earnings prior to routine departure? – An empirical study about earnings management prior to routine CEO departure on Swedish firms listed on NASDAQ OMX Stockholm

Abstract: Title: Does the CEO manipulate earnings prior to routine departure? – An empirical study about earnings management prior to routine CEO departure on Swedish firms listed on NASDAQ OMX Stockholm Seminar Date: 2015-05-25 Course: FEKN90: Degree project, Master of Science in Business and Economics (30 University credit points) Authors: Biljana Colevska and Ida Lindgren Advisor: Per Magnus Andersson Key words: Routine CEO departure, earnings management, discretionary accruals, research and development expenditures, Swedish public market Purpose: The aim of the study is to empirically describe and analyze whether and if so why CEOs on Swedish public firms, listed on NASDAQ OMX Stockholm, use earnings management prior to routine CEO departures. Theoretical perspective: This study is based on prior research that examines the relationship between routine CEO departures and the use of earnings management and literature on earnings management. Furthermore, the theories used in this thesis are based on the agency theory, the stakeholder and shareholder theory, compensation, corporate governance and ownership structure. Methodology: A quantitative study is made with a deductive approach by running a cross sectional regression to measure the use of discretionary accruals and a panel data regression on the explanatory variables. Furthermore, a panel data regression is used to measure the use of research and development expenses prior to a routine CEO departure. Empirical foundations: The analysis includes companies listed on NASDAQ OMX Stockholm with a routine CEO departure between the period 2007 to 2014. Conclusion: Real earnings management occurs prior to routine CEO departures, while there tends to be less use of accruals management. A negative significant relationship is found between board independence, institutional ownership, market capitalization and earnings management. A positive significant relationship is found between the market book ratio and earnings management.