The Influence of Turnover among Other Top Executives and Local Market Characteristics on Financial Reporting Risk in the Presence of CEO and CFO Continuity

Abstract

Prior research suggests that turnover among key executives such as the CEO or CFO can influence stakeholder perceptions of financial reporting risk. In this study, we explore whether greater turnover among the members of a firms’ top executive group other than those with direct financial reporting oversight responsibilities (i.e., the CEO and CFO) influences key stakeholders’ concerns about financial reporting risk or whether consistency in the CEO and CFO positions is sufficient to alleviate any such concerns. Consistent with predictions based on upper echelon theory (UET), we find that greater turnover among executives other than the CEO and CFO increases perceptions of financial reporting risk. We further find that these perceptions vary based on local market characteristics that affect a firm’s ability to replace executive talent. Further analyses suggest that the perceptions of financial reporting risk in response to turnover among other top executives offsets deterioration in financial reporting quality.

Keywords: Turnover, financial reporting risk, audit fees, financial reporting quality

JEL Classification: G30, M12, M41, M42