CEO Retirement, Corporate Governance and Conditional Accounting Conservatism

Based on 16,604 observations between 1994 and 2006, this study revisits the “horizon problem” by examining how CEO retirement affects conditional accounting conservatism. We hypothesize and find that firms become less conservative in their financial reporting before the retirement of their CEOs, and that strong corporate governance mitigates the effect of CEO retirement. The literature concerning the horizon problem has suggested that CEOs manipulate earnings to boost short-term performance before they leave their companies (Dechow and Sloan, 1991; Smith and Watts, 1982), but the evidence is mixed. By examining conditional conservatism, we avoid some of the methodological difficulties that confront researchers when examining either real or accrual earnings management. Ours is the first study to provide evidence on how the horizon problem shapes conditional accounting conservatism