Big Baths Around Turnovers: What Happens if the Former CEO Stays on Board?

We examine whether retaining the former CEO as a board member has an impact on big bath accounting around CEO turnovers. Early evidence shows that when a CEO turnover occurs, the new CEO uses big bath to shift the responsibility for low earnings toward the previous management. However, the former CEO is often retained. This event may restrict the new CEO’s ability to take a big bath. Using a hand-collected sample of CEO turnover events in US firms, we find that CEO turnover increases the probability of a big bath. However, retaining the CEO acts as a monitoring mechanism by reducing the probability of big baths, especially opportunistic ones. Our findings indicate that CEO retention could be a useful corporate governance mechanism that restricts new CEO’s opportunistic practices.