Does the origin of the new CEO and the presence of the former CEO on the board impact firm performance and earnings management ?

In this paper, we examine firm performance and earnings management in the context of CEO turnover. We posit that a newly appointed external CEO has more latitude when the former CEO is not sitting on the board of directors. On the contrary, a new internally recruited CEO may have limited latitude when the former CEO is sitting on the board. To test our hypotheses, we analyze a non-contaminated sample of 136 CEO changes in France, over the period 2006-2016. We find no impact on firm performance in the short-run. However, in line with our predictions, we find significantly higher earnings management when a new external CEO is appointed and the former CEO is not sitting on the board. Overall, our results should be of interest for boards of directors having to make decisions in the context of new CEO appointment and former CEO nomination