Big bath accounting and CEO turnover: the interplay between optimal contracts and career concerns

Abstract Following executive turnovers big bath accounting is often observed. We investigate a new manager’s earnings management incentives in his first year office two-period model with career concerns and earnings’ lack of timeliness. determine the optimal incentive contract decompose equilibrium into two components: an explicit resulting from compensation implicit concerns. While always motivate manager to shift backwards, induces either forwards or backwards. In particular, we show that contracts "negative" may result equilibrium, i.e., inflate after CEO turnover. demonstrate how strategy depend on timeliness, precision initial information about ability intensity competition for CEOs. Our results help explain why turnover observed many but not all cases.