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
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: Suggested Citation