Real earnings management in Thailand: CEO duality and serviced early years

Abstract

The purpose of this paper is to investigate the individual and interaction effects of chief executive officers (CEO)-chairman leadership structure (CEO duality) and CEO-serviced early years (the first three years in office) on real earnings management (REM) through sales activities of listed firms in the Stock Exchange of Thailand (SET). The longitudinal data on CEO and chairman names of 3,825 firm-year observations were manually gleaned from the SET market analysis and reporting tool and the annual reports from 2001 to 2015. Multiple regressions were utilized to analyze the effects. The findings show a positive relationship between CEO duality and sales-driven REM. However, the CEO-serviced early years have no association with sales-driven REM. The CEO duality/serviced early year interaction effect is positively correlated to sales manipulation. In addition, firms with the CEO duality engage in upward or downward sales-driven REM, while firms with newly appointed CEO adopt only the upward sales-driven REM. In firms which their newly appointed CEO concurrently serves as chairman, either upward or downward sales-driven REM strategy is introduced. The findings provide some grounds for capital market and regulators to exercise caution when it comes to firms with the newly appointed CEO and/or the CEO duality, given a high tendency to manipulate sales revenues. This study is the first to investigate the relationship between the CEO duality/serviced early years on sales-driven REM. The findings are expected to complement existing publications on REM.