Big bath following CEO turnover and information asymmetry

Abstract

Consequences of accounting big bath on the firm’s information environment have not reached consensus yet. Big bath can either improve the firm’s information environment by realigning accounting values with economic values or degrade information environment by hiding poor performance. This paper examines whether the quality of bath depends on presence of CEO turnover event. Employing a difference-in-difference analysis, I find that baths following CEO turnover result in smaller decreasing information asymmetry compared with baths without CEO turnover. I also document that consequence of bath following CEO turnover on the firm’s information asymmetry depends on CEO origin. Baths taken by internally recruited CEO result in smaller decreasing information asymmetry when compared with baths taken by externally promoted CEO.