The Relative Usefulness of Cash Flows versus Accrual Earnings for CEO Turnover Decisions Across Countries: The Role of Investor Protection

57 Pages Posted: 8 Feb 2016

See all articles by Jinshuai Hu

Jinshuai Hu

Xiamen University - Institute for Financial and Accounting Studies

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Date Written: February 2016

Abstract

This study investigates the role of investor protection in determining the relative usefulness of cash flows versus accrual earnings for assessing CEO performance and replacing poorly performing CEOs. Using a large sample of listed firms from 41 countries, we find that as the strength of investor protection decreases, the likelihood of CEO turnover becomes more sensitive to cash flow performance but less sensitive to accrual earnings. Our results suggest that cash flow information plays a more important role than accrual earnings in facilitating efficient contracting between corporate boards and CEOs in an environment with poor protection of investor rights. Further analysis suggests that in such an environment, external disciplinary mechanisms such as analysts’ cash flow forecasting activities significantly enhance the ability of corporate boards to identify and dismiss incompetent CEOs with poor performance, particularly poor cash flow performance.

Keywords: cash flow; investor protection; relative usefulness; CEO turnover; international accounting

JEL Classification: M41; G14; G15

Suggested Citation

Hu, Jinshuai and Kim, Jeong-Bon, The Relative Usefulness of Cash Flows versus Accrual Earnings for CEO Turnover Decisions Across Countries: The Role of Investor Protection (February 2016). Available at SSRN: https://ssrn.com/abstract=2729175 or http://dx.doi.org/10.2139/ssrn.2729175

Jinshuai Hu (Contact Author)

Xiamen University - Institute for Financial and Accounting Studies ( email )

Xiamen, Fujian 361005
China

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

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