CEO Type and Earnings Management to Avoid Loss or Earnings Decreases: Evidence from South Korea

Kyunga Na, Yun-jeong Lee, Hagyeong Yu
(Submitted 7 February 2022)
(Published 2 May 2023)


This study examines the relations between the CEO type (owner CEO vs. professional CEO) and earnings management over 9,266 firm-years from 2011 to 2020 in Korea. Two earnings management measures, accrual management and real activity management (abnormal cash flow from operations, abnormal production cost, and abnormal discretionary expense), are considered as means to avoid reporting losses or earnings decreases. We partition the sample into two groups based on the type of CEO (owner CEO vs. professional CEO) and investigate whether earnings management is used for achieving earnings targets (small profit or small earnings increases) for each group. We find all earnings management measures are significant at the 5% level or better in the direction of aggressive earnings management in the owner CEO sample, while all but one measure (abnormal production cost) are insignificant in the professional CEO sample. Our findings suggest that an owner CEO is more likely to manage earnings to achieve small profit or small earnings increases compared to a professional CEO.


CEO type, owner CEO, professional CEO, earnings management, discretionary accruals, real activity management

Full Text: PDF

DOI: 10.22146/gamaijb.72880


Achleitner, A.K., Gunther, N., Kaserer, C., & Siciliano, G. (2014). Real earnings management and accrual-based earnings management in family firms. European Accounting Review, 23 (3), 431–461.

Alhebri, A.A.,& Al-Duais, S.D.(2020). Family businesses restrict accrual and real earnings management: Case study in Saudi Arabia. Cogent Business & Management, 7 (1), 1–15.

An, H.B., Choi, K.D., & Song, J.H. (2002). Ownership structure and the informativeness of accounting earnings. Korean Accounting Review, 27 (4), 1–30.

Badertscher, B.A., Katz, S.P., & Rego, S.O. (2013). The separation of ownership and control and corporate tax avoidance. Journal of Accounting and Economics, 56 (2–3), 228–250.

Bae, H.J., & Kim, W.S. (2016). A study on the effect of CEO types on income tax smoothing. Accounting Information Review, 34 (1), 203–227.

Beaudoin, C.A., Cianci, A.M., & Tsakumis, G.T. (2015). The impact of CFOs' incentives and earnings management ethics on their financial reporting decisions: The mediating role of moral disengagement. Journal of Business Ethics, 128 (3), 505-518.

Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Finance Economics, 80 (3), 511–529.

Boučkovà, M. (2015). Management accounting and agency theory. Procedia Economics and Finance 25, 5–13.

Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24 (1), 99–126.

Chen, T-Y., Gu, Z., Kubota, K., & Takehara, H.(2015). Accrual-based and real activities based earnings management behavior of family firms in Japan.The Japanese Accounting Review, 5, 21–47.

Choi, U.Y., & Bae, H.J. (2011). A study on the effect of the separation of ownership and management on manager’s risk preference. Korean Accounting Journal, 20 (3), 213–230.

Claessens, S., Djankov, S., & Lang, L.H.P. (2000). The separation of ownership and control in east asian corporations. Journal of Financial Economics, 58, 81–112.

Cohen, D.A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50 (1), 2–19.

Davis, J.H., Schoorman, F.D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22 (1), 20–47.

Dechow, P.M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18 (1), 3–42.

Dechow, P.M., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50 (2–3), 344–401.

Dechow, P.M., Richardson, S.A., & Tuna, R. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of Accounting Studies, 8, 355–384.

Dechow, P.M., Sloan, R., & Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70 (2), 193–225.

Dechow, P.M., Sloan, R., & Sweeny, A. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13 (1), 1–36.

Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings management to exceed thresholds. Journal of Business, 72 (1), 1–33.

Demsetz, H. (1986). Corporate control, insider trading, and rates of return. The American Economic Review, 76 (2), 313–316.

Eng, L.L., Fang, H., Tian, X., Yu, T.R., & Zhang, H. (2019). Financial crisis and real earnings management in family firms: A comparison between China and the United States. Journal of International Financial Markets, Institutions & Money, 59, 184–201.

Ghaleb, B.A., Kamardin, H., & Tabash, M.I. (2020). Family ownership concentration and real earnings management: Empirical evidence from an emerging market. Cogent Economics & Finance, 8 (1), 1–17.

Gomez-Mejia, L.R., Larraza-Kintana, M., & Makri, M. (2003). The determinants of executive compensation in family-controlled public corporations. Academy of Management Journal, 46 (2), 226–237.

Graham, J.R., Harvey, C.R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40 (1–3), 3–73.

Grossman, S.J., & Hart, O.D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94 (4), 691–719.

Gunny, K.A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27 (3), 855–888.

Heckerman, D.G. (1975). Motivating managers to make investment decisions. Journal of
Financial Economics
, 2 (3), 273–292.

Heckman, J. (1979). Sample selection bias as a specification error. Econometrica, 47 (1), 153–161.

Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.

Jung, J.E., & Kim, H.S. (2014). The impact of K-IFRS adoption and motivation to avoid losses on the earnings management. Korea International Accounting Review, 54, 60–81.

Kang, H.C., & Kim, J.M. (2016). Why do family firms switch between family CEOs and non-family professional CEO? Evidence from Korean Chaebols. Review of Accounting and Finance, 15 (1), 45–64.

Kim, B.G., & Kim, D.W. (2010). Major shareholder ownership and business diversification: The consequences of owner-managed and agent-led firm. The Journal of Korean Financial Engineering, 9 (2), 103–127.

Kim, H.S., & Song, J.Y. (2011). The impact of corporate ownership structure on R&D investment in Korea. Journal of Strategic Management, 14 (2), 93–112.

Kim, H.Y., Kim, H.S., & Seo, J.G. (2015). A study on owner-manager, earning management and dividend. Review of Accounting and Policy Studies, 20 (4), 85–110.

Kim, J.B., Baik, S.M., & Choi, J.M. (2009). Earnings management through real operational activities manipulation and market response. Korean Management Review, 38 (5), 1185–1211.

Kim, T.S., & Cho, H.K. (2017). A study on the influence of electing industry specialist auditors based on CEO’s types. The Journal of Korean Management Practice Association, 3 (1), 5–17.

Kothari, S.P., Leone, A.J., & Wasley, C.E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39 (1), 163–197.

Kwak, Y.M., & Choi, J.S. (2011). Earnings management associated with types of CEO turnover. Korean Accounting Review, 36 (2), 129–184.

La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54 (2), 471–517.

Lee, A.Y., Chun, S.B., & Kim, S.H. (2012). Controlling shareholders’ ownership structure and real earnings management. Korean Accounting Review, 37 (1), 157–189.

Lee, A.Y., Chun, S.B., & Park, S.S. (2007). CEO turnover and earnings management. Korean Accounting Review, 32 (2), 117–150.

Lee, S.C. (2014). Relationship between characteristics of managers and corporate governance system and cost stickiness. Korean Accounting Research, 23 (2), 251–282.

Lim, J.O. (2007). The relationship between types of manager and earnings management. Journal of Industrial Economics and Business, 20 (1), 257–275.

Martin, G., Campbell, J.T., & Gomez-Mejia, L.(2016). Family control, socioemotional wealth and earnings management in publicly traded firms. Journal of Business Ethics, 133 (3), 453-469.

Morck, R., Shleifer, A., & Vishny, R.W. (1988). Management ownership and market valuation. Journal of Financial Economics, 20, 293–315.

Na, K., & Hong, J.Y. (2017). CEO gender and earnings management. The Journal of Applied Business Research, 33 (2), 297–308.

Nam, Y.S. (2017). An exploratory study on the influence of CEO type, outside director, and firm performance on the appointment of family member in BOD. Journal of Human Resource Management Research, 24 (5), 75–86.

Nam, Y.S., & Choi, W.Y. (2016). The effects of CEO type and corporate governance mechanisms on corporate social responsibility. The Journal of Professional Management, 19 (2), 209–222.

Oh, S.Y., Kim, Y.J., Ahn, S.H., & Hwang, M.H. (2017). The effect of firm’s manager types on auditor selection. Accounting Information Review, 35 (4), 155–180.

Park, A.Y., Lee, K.T., & Lee, C.S. (2006). The effect of executive stock options compensation and ownership structure on R&D investment. Korean Accounting Review, 31 (2), 89–126.

Park, J.I., Paik, H.W., & Jung, S.H. (2015). Accrual-based and real earnings management activities to avoid losses: Empirical evidence on KOSPI and KOSDAQ listed firms. Korean Management Review, 44 (6), 1539–1574.

Qawasmeh, S.Y.,& Azzam, M.J.(2020). CEO characteristics and earnings management. Accounting, 6, 1403–1410.

Razzaque, R.M.,Ali, M.J., & Mather, P.R. (2016). Real earnings management in family firms: Evidence from an emerging economy. Pacific-Basin Finance Journal, 40, 237–250.

Ross, S.A. (1973). The economics theory of agency: The principal’s problem. The American Economic Review, 63 (2), 134–139.

Ross, S.A. (1974). On the economic theory of agency and the principle of similarity, in: M.D.
Balch et al., eds., Essays on economic behavior under uncertainty (North-Holland, Amsterdam).

Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.

Ryu, J.H., & Cho, S.P. (2021). The effects of CEO type and ownership structure of the Chaebol on the behavior of R&D expenditures. Korean Accounting Review, 46 (1), 41–82.

Seo, J.I., & Chang, H.W. (2010). CEO characteristics and firm R&D investment: The moderating role of TMT characteristics and ownership structure. Journal of strategic management, 13 (1), 29–49.

Shin, H.H., & Chang, J.H. (2005). An analysis of the determinants of CEO turnover: Firm performance, professional CEO, and business group. Korean Management Review, 34 (1), 289–311.

Shin, S.H., & Lee, S.C. (2016). The characteristics of the accounting treatment of R&D costs by the type of CEO. Accounting and Auditing Research, 58 (3), pp.73–96.

Shleifer, A., & Vishny, R.W. (1986). Large shareholders and corporate control. Journal of Political Economy, 94 (3), 461–488.

Son, H.C., & Park, S.K. (2016). The influence of the owners management participation level on earnings management. Korean Journal of Management Accounting Research, 16 (2), 107–137.

Song, E.J. (2018). The impact of the difference between cash flow rights and voting rights on R&D investments: Connected to the level of cash flow rights. Korean management review, 47 (2), 425–449.

Teoh, S.H., Welch, I., & Wong, T.J. (1998). Earnings management and the underperformance of seasoned equity offerings. Journal of Finance Economics, 50, 63–99.

Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value? Journal of Financial Economics, 80 (2), 385–417.

Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44 (3), 619–656.

Yang, C.Y., Lai, H.N., & Tan, B.L. (2008). Managerial ownership structure and earnings management. Journal of Financial Reporting & Accounting, 6 (1), 35–53.

Yang, M.L. (2010). The impact of controlling families and family CEOs on earnings management. Family Business Review, 23 (3), 266–279.

Zouari, Z., Lakhal, F.,&Nekhili, M. (2015). Do CEO characteristics affect earnings management? Evidence from France. International Journal of Innovation and Applied Studies, 12 (4), 801–819.


  • There are currently no refbacks.

Copyright (c) 2023 Gadjah Mada International Journal of Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.