Overinvestment, subsequent earnings management, and CEO tenure

In this study, I empirically examine whether the managers of firms that overinvest have an incentive to subsequently distort financial information for keeping up with stakeholders' expectations about investment returns. Also, because CEO tenure is related to the capacity of the manager to influence both firm's resources allocation and the financial reporting process, I hypothesise that the expected positive association between overinvestment and subsequent earnings management does not hold for newly appointed CEOs. By using several proxies for both overinvestment and earnings management to test my expectations, results suggest that firms' current overinvestment is positively associated with subsequent earnings management, measured through both the opportunistic use of accruals and sales manipulation. Finally, empirical tests support the expectation that the opportunistic behaviour of concealing investment inefficiencies through subsequent earnings management only holds for CEOs with greater tenure.