Top Executive Turnover and Loan Loss Provisions : Evidence from Japanese Regional Banks

This study examines loan loss provisions following top executive turnovers in Japanese banks. The study differentiates between voluntary and forced turnover and inside and outside succession. The results show that incoming top executives, following forced turnover or outside succession, tend to reduce loan loss provisions in the second year of their tenure. This suggests that incoming top executives attempt to create a positive impression of their abilities by increasing earnings in the second year. This evidence differs from previous research showing “big bath” accounting in the first year. Additionally, outgoing top executives recognize greater loan loss provisions in the final year before outside succession. This study further shows that incoming top executives attempt to increase earnings following succession through gains and losses from security sales, commissions, and fees. In summary, we contribute to the bank’s earnings management literature by showing that income-increasing accrual-based and real earnings management are carried out in the early stages of top executive tenure