Academy of Management Journal

2004, Vol. 47, No. 2, 267275.

EARNINGS MANAGEMENT FOLLOWING DUALITY-CREATING

SUCCESSIONS: ETHNOSTATISTICS, IMPRESSION
MANAGEMENT, AND AGENCY THEORY
WALLACE N. DAVIDSON III
Southern Illinois University

PORNSIT JIRAPORN
Texas A&M International University

YOUNG SANG KIM

Quinnipiac University

CAROL NEMEC
Southern Oregon University

We explore impression and earnings management via reasoning and methods

grounded in ethnostatistics and agency theory. We hypothesized that earnings man-
agement occurs more frequently following duality-creating successions than otherwise
because CEO-chairs have greater control of the impressions created by their firms
financial reports and are operating under greater expectations of positive results.
Using a sample of 173 duality-creating succession announcements and 112 non-
duality-creating succession announcements, we obtained empirical results consistent
with these predictions.

We have all been told at one time or another to
put your best foot forward. In doing so, an indi-
vidual attempts to manage the impression he or she
gives. Corporations may also attempt to manage the
impressions they give, but if doing so leads to ex-
cessive earnings management, have corporations
gone too far? We define earnings management as
the use of flexible accounting principles that allow
managers to influence reported earnings, thereby
causing reported income to be larger or smaller
than it would otherwise be. The Enron, Arthur
Anderson, and WorldCom scandals of the early
2000s have highlighted the importance of impres-
sion management and the fact that impression man-
agement may be abused. Recently, ten of Wall
Streets most prominent investment banks signed a
settlement with security regulators after they had
been accused of excessive impression management
in overly optimistic reports on their clients. If a
corporations impression management hurts share-
holders, then it may be an agency cost.
The theory that we propose is that impression
management is related to agency problems. Agency
problems occur when managers do not operate a
company for the shareholders best interests. When
a firm manages the impression it presents to the
marketplace through earnings management, share-
holders and other stakeholders must base financial
decisions on numbers that do not, perhaps, reflect
267
the true economic conditions of the firm (Neu,
1991). We propose that impression management
can obscure economic results and cloud the ability
of all stakeholders to make financial decisions. We,
therefore, extend agency theory by showing that
impression management in general and earnings
management in particular can be an agency prob-
lem. The agency problem occurs because investors
and other stakeholders may not be able to make
optimal decisions concerning a company.
If earnings management is viewed as a corpora-
tions attempt to manage its image and the impres-
sions it gives, then it is important to understand
the processes that may drive the phenomenon.
As measuring and reporting performance has
become increasingly important in our society,
ethnostatisticsthe study of how statistics are pro-
duced and managedmay need to be included in
management thought (Corvellec, 1997). In relating
impression management to an agency problem, we
shed light on how numbers can be misused.
Specifically, we examine the question of whether
more earnings management follows duality-
creating successions than non-duality-creating suc-
cessions. We hypothesize that an executive put into
the dual position of CEO and chair has both greater
expectations for improved performance and greater
power to control the impressions a firm makes as it
releases accounting information. The increased ex-
268 Academy of Management Journal
pectations and control may lead a dual executive to
create the impression of improved performance
through earnings management.
A firms board of directors is often described as
the shareholders first line of defense against in-
competent management (Weisbach, 1988). Yet if
the companys CEO is the board chair, the primary
monitor of management is management itself.
Shareholder groups, Congress, and the Securities
and Exchange Commission (SEC) have addressed
the duality issue (Brickley, Coles, & Jarrell, 1997)
and have argued that duality may lead to subopti-
mal managerial performance. Since numerous
studies have indicated that duality does not impact
overall financial performance (Baliga, Moyer, &
Rao, 1996; Brickley et al., 1997; Brickley, Coles, &
Jarrell, 1997; Daily & Dalton, 1997), the controversy
it generates may be inappropriate. However, we
refocus the debate about duality away from its re-
lation to overall performance and direct it to a more
situational context, impression management. We
therefore, extend agency theory by showing that the
agency problems associated with the dual gover-
nance structure may be situational and will not,
therefore, show up in overall performance results.
Using a sample of the announcements of 173
duality-creating successions and 112 non-duality-
creating successions from the years 198292, we
obtained results consistent with the idea that dual-
ity creates situationally relevant agency problems.
We found that, following duality-creating succes-
sions, income-increasing earnings management
occurs to a greater extent than it does in non-
duality-creating successions.
We also propose that when performance prior to
a succession has been poor, a successor CEO will be
under greater pressure to show improved perfor-
mance. It may be this poor prior performance that
creates the need for the executive to manage earn-
ings and thereby exacerbate agency problems. We
present evidence consistent with this hypothesis.
THEORETICAL PERSPECTIVE
The desire for performance has gained an in-
creasing importance in our society, and this desire
may lead to creativity in financial reporting (Cor-
vellec, 1997). Ethnostatistics (Gephart, 1988) is the
situational context in which we examine a poten-
tial agency problem, duality. We argue that when a
company engages in impression management in
regard to earnings, the accounting numbers it re-
ports may not reflect its economic condition. If
shareholders make nonoptimal decisions because
of the managed earnings, then impression manage-
ment through earnings management may be consid-
April
ered an agency cost. If duality exacerbates the po-
tential for agency problems, then the presence of a
dual CEO-chair may increase the extent of earnings
management.
CEOs may have incentives to manage their com-
panys earnings. CEOs are generally evaluated and
compensated on the basis of their firms financial
performance. Since it is not highly likely that CEOs
can directly control stock market performance, they
may seek to control accounting-based measures.
The research literature has documented instances
in which companies have engaged in earnings man-
agement in relation to stock issues (Teoh, Welch, &
Wong, 1998), management buyouts (Wu, 1997), take-
overs (Easterwood, 1997), auditor changes (DeFond &
Subramanyan, 1998), and auditor selection, (Becker,
DeFond, Jiambalvo, & Subramanyam, 1998), among
other instances.
Duality, Impression Management, and Agency
Theory
Managers may have personal goals that compete
with those of shareholders. Since managers have
been empowered by shareholders to make deci-
sions, a conflict of interests has potential agency
costs. Earnings management may be a type of
agency cost if managers release financial reports
that do not present an accurate economic picture of
a firm and shareholders make nonoptimal invest-
ment decisions as a result. Thus, earnings manage-
ment is related to agency theory because the former
can create or exacerbate agency costs. It has been
argued the dual governance structure can lead to or
increase agency problems. We therefore propose
that there may be a link between duality and earn-
ings management through their relations with
agency theory.
A new CEO may feel pressure to show improved
performance and to convince the board and share-
holders that their hiring decision is moving the
company in a good direction. Prior research has
documented that new CEOs manage earnings.
LaSalle, Jones, and Jain (1993) reported that firms
experiencing CEO changes are more likely than
other firms to report income in ways that show
either increases or decreases in relation to past
income. Furthermore, Pourciau (1993) reported
that executive changes led to earnings management
that increased reported earnings following execu-
tive succession. Neither of these studies attempted
to address the conflict between ideas based respec-
tively on agency and organization theory that is
inherent in the duality literature.
The debate on duality has focused on its poten-
tial to create agency problems. A strict interpreta-
2004 Davidson, Jiraporn, Kim, and Nemec
tion of agency theory and duality is that the dual
governance structure can allow management to co-
opt board power (Jensen, 1993). Brickley, Coles,
and Jarrell (1997) took a different perspective.
Their approach embodies ideas from both the trans-
action cost and social theories of the firm as well as
agency theory ideas. They maintained that duality
may have costs, as outlined under agency theory:
nonoptimal decisions made by a dual executive.
But they also saw benefits of duality in its preven-
tion of costs associated with splitting the positions
of chair and CEO; these include the costs of infor-
mation, shared authority, succession processes,
and two large salaries, as well as reputational costs.
Because both forms of leadership have costs and
benefits, it is not theoretically obvious which lead-
ership structure is optimal. Under this view,
agency theory costs and social theory/transaction
costs and benefits are not mutually exclusive. The
decision to use the dual or nondual leadership
structure is a matter of comparing costs to benefits
in each situation.
The empirical evidence in Brickley, Coles, and
Jarrell (1997) suggests that the costs of separating
the CEO and chair positions may be larger than the
agency costs of duality. Other research has also
documented that the agency costs of duality may
not outweigh its benefits (Dalton, Daily, Ellstrand,
& Johnson, 1998).
Overall Performance versus Situational
Outcomes
From prior research, it is difficult to conclude
that the costs of duality outweigh its benefits and
that duality is detrimental to stakeholders. How-
ever, there is research suggesting that in certain
contexts, duality may be inconsistent with an inde-
pendent monitoring role for a board. For example,
McWilliams and Sen (1997) found that stock mar-
ket investors reacted more negatively to the adop-
tion of antitakeover amendments by companies
with dual governance, implying that they viewed
the amendments as more likely to entrench execu-
tives under dual leadership. Similarly, Mallette
and Fowler (1992) found that dual leadership made
adoption of poison pills more likely. Cannella and
Lubatkin (1993) found that the likelihood that a
CEO will be fired is lower in firms with dual lead-
ership structure, which may imply that duality en-
trenches managers.
The idea that duality may not impact long-run
firm performance but may be situationally impor-
tant is analogous to views forwarded in a related
line of research on board composition. Board com-
position has limited impact on overall firm perfor-
269
mance but does seem to mitigate agency problems
in certain situations (Hermalin & Weisbach, 2000).
Duality may be one of many variables that influ-
ence a firms financial condition, and it may have a
similar situational importance even if it does not
impact overall financial performance. Measures of
the overall financial impact of duality could be
confounded by the many forces that influence fi-
nancial outcomes. This problem would be most
severe when researchers are addressing dualitys
impact on overall or long-run performance, and it
may, therefore, explain the lack of impact in the
studies noted above. The confounding problem
may not be as severe when a researcher is measur-
ing the impact of duality in a specific situation.
When an agency situation arises, a dual leader may
not be as likely to support shareholders and may
pursue outcomes that support the leaders own in-
terests and position in the firm. Examining the spe-
cific situations in which the agency costs of duality
occur should lead to a better understanding of the
costs and benefits of the various leadership struc-
tures.
Since board independence can be negatively in-
fluenced under the dual leadership structure, du-
ality may make earnings management more likely
in a CEO-chairs first year, for several reasons. Gen-
erally, in the first year of a new appointment, a
leader will want to accomplish considerable
change. New leaders may be given more authority
to make changes and to set the tone for their peri-
ods of leadership. The greater authority given the
dual leader may be a double-edged sword, how-
ever, in that expectations about fast and positive
effects of the change in leadership might also be
high. Given these high expectations, the ability of a
new CEO-chair to report better earnings in the
initial year may be important. These expectations
may not be as strong in nondual governance struc-
tures, since no single executive would have to
shoulder the blame for poor performance. Since the
income-increasing effects of earnings management
are temporary and will be reversed later (Jones,
1991), a nondual CEO with sights set on the chair
position may not be willing to sacrifice longer-term
performance for immediate increased income. Fur-
thermore, income-increasing earnings management
with separate leaders would require collusion or at
least acquiescence by the two leaders, thus reduc-
ing its probability. On the other hand, managers
incentives and compensation are often based on
their companies financial performance, so in gen-
eral it may be in managements own interest to give
the impression of better performance.
This combination of managements discretion
over reported earnings, the effect of earnings on
270 Academy of Management Journal
management compensation, and expectations for
dual managers may lead to impression manage-
ment through earnings management. We propose:
Hypothesis 1. Earnings management will be
greater following succession announcements
that put one individual into a dual leadership
role than following succession announcements
that do not.
We would also expect that the incidence of earn-
ings management after succession announcements
will be greater when prior performance has been
poor. The intuitive relation between prior perfor-
mance and succession has led to a large number of
studies whose results suggest that poor perfor-
mance is related to CEO turnover and succession
(e.g., Chung, Lubatkin, Rogers, & Owers, 1987; Dal-
ton & Kesner, 1985; Datta & Guthrie, 1994; David-
son, Nemec, Worrell, & Lin, 2002; Puffer & Wein-
trop, 1991).
Since poor prior performance often leads to turn-
over, the successor CEO of a poorly performing firm
will likely be under pressure to show positive re-
sults. Affecting real economic change often takes
time, yet a new CEO may need to exhibit positive
results immediately to be allowed to continue. If
positive change does not occur naturally, the new
CEO may feel pressure and have incentives to cre-
ate the appearance of improved financial perfor-
mance through impression (earnings) management.
When prior performance has not been poor, there
will be less pressure to demonstrate immediate
results.
The poor prior performance may be the genesis of
the impression management that follows succes-
sions and may, therefore, be the genesis of the
resulting agency problems. Without poor prior per-
formance, there would be less need to improve
reported performance. Thus, poor performance
may be the causal link between impression man-
agement and agency problems. We therefore
propose:
Hypothesis 2. Earnings management will be
greater following succession announcements
preceded by poor prior performance than it
will be following succession announcements
not preceded by poor performance.
METHODS
Definition and Measurement of Earnings
Management
Under generally accepted accounting principles,
companies use accrual accounting, whereby in-
come is recognized when it is earned and expenses,
April
when they are incurred, regardless of when cash is
received or disbursed. Accrual accounting gives
managers discretion in determining reported earn-
ings. Management has a great deal of control over
the timing of actual expenditures and also has some
ability to alter the timing of recognition of revenues
and expensesfor example, by advancing recogni-
tion of sales revenue through credit sales, or delay-
ing recognition of losses by waiting to establish loss
reserves (Teoh, Welch, & Wong, 1998).
There are several ways to measure earnings man-
agement. We used the modified Jones (1991) model
to detect earnings management. Although this ap-
proach may not measure sales-based earnings ma-
nipulations, it has been shown to have the most
power in detecting earnings management (De-
chow, Sloan, & Sweeney, 1995: 193) and only the
Jones and modified Jones models appear to have
the potential to provide reliable estimates of discre-
tionary accruals (Guay, Kothari, & Watts, 1996:
104). Our results are, of course, limited by model
selection, and we must recognize that no model can
detect the most blatant forms of earnings manage-
ment, the outright fabrication of results. A discus-
sion of our approach is available from the authors
upon request.
Our approach divides current accruals into
discretionary and nondiscretionary parts. Accruals
include both accrued assets and accrued liabilities,
which are respectively, amounts to be received and
amounts to be paid in the future. To identify non-
discretionary current accruals, we regressed the
current accruals of firms that were not in our sam-
ple on their changes in sales. These firms were
matched to sample firms by two-digit SIC code and
had data on COMPUSTAT. (Using four-digit SIC
codes produced qualitatively similar but slightly
weaker results.) To reduce heteroskedasticity, we
deflated all variables by the lagged value of total
assets. The resulting regression parameters were
applied to the change in sales less the change in
accounts receivable of the sample firms to predict
the level of nondiscretionary current accruals that
would be normal in each industry. The difference
between the predicted nondiscretionary current
accruals and the actual reported accruals is called
discretionary current accruals (DCA). When its
value is significantly different from zero, the
DCA is considered to be evidence of earnings
management.
Sample
Our sample was composed of corporations and
their CEOs included in Business Weeks 1992 re-
port, The Corporate EliteThe Chief Executives
2004 Davidson, Jiraporn, Kim, and Nemec
of the 1000 Most Valuable Publicly Held U.S. Com-
panies, covering a large cross-section of indus-
tries. This report is a compilation of large firms in
the public eye, whose shareholders, both institu-
tional and noninstitutional, would question or cen-
sure a firm in the marketplace if executive duality
were a valid concern.
Starting in 1992, and going back to 1982, we
searched the financial press to find succession an-
nouncements for the executives in our sample. We
categorized each announcement as indicating ei-
ther duality or nonduality. We obtained complete
information on 285 succession announcements.
This included 173 duality announcements and 112
nonduality (separate CEO and chair) announce-
ments. Brickley, Coles, and Jarrell (1997) argued
that the dual leadership structure is the most com-
mon organizational form. For our sample of 285
successions, we expected there to be 142.5 of each
type of governance structure if they occurred
equally often. We compared actual to expected fre-
quency, and the resulting chi-square was 13.06 (sig-
nificant at .01). The observed frequency of duality
was thus greater than expected by chance.
Performance Data
To determine prior firm performance, we com-
puted cumulative abnormal returns (the summed
daily abnormal returns) over a 200-trading-day pe-
riod extending from 350 days prior to an announce-
ment date to 150 days prior to the announcement
date as measures of prior firm performance. We
used the standard event study methodology and the
market model whose parameters come from the
period 600 to 351 days, as described in Fama,
Fisher, Jensen, and Roll (1969). This procedure ad-
justs stock returns for overall market movement
and individual firm risk. If this variable is positive
(negative) it means that the firms stock has per-
formed well (poorly) relative to the stock market.
We used a stock market measure of performance
because use of an accounting measure would have
biased our attempt to determine if there has been
accounting manipulation.
Controls
We controlled for board independence, defined
in terms of the representation of firm insiders (em-
ployees) and outsiders, because an independent
board (one with a greater proportion of unaffiliated
outsiders) may offset some of the agency problems
created in a dual governance structure. Empirical
findings in Xie, Davidson, and DaDalt (2003) dem-
onstrated that independent and active boards
271
lessen earnings management. We obtained informa-
tion about the boards from the proxy statements
that immediately preceded the successions. We
classified an insider as a person who was employed
by a firm as well as sitting on its board. We classi-
fied as an affiliated outsider a director not directly
employed by a firm yet having very close or strong
ties to the firm or to its top executive officers. This
category includes, but is not limited to, outside
legal counsel, retired executives, other members of
the founding or controlling family of a focal firm,
directors employed by other firms that hold mate-
rial voting shares of the firms securities, and em-
ployees of material capital providers. Finally, we
classified directors who did not fall into one of the
two previous categories as independent outsiders.
Other measures of board independence were the
proportional voting power of insiders and board
members, and board member tenure. Greater voting
power through stock ownership provides motiva-
tion for a board to act on behalf of shareholders.
Board tenure may also reflect board power; it was
measured as the average number of years an inde-
pendent outside director has served on the board.
We also classified each succession as an inside or
outside one, drawing on the time elapsed between
an individuals initial hiring by a firm and the date
of appointment as CEO. An executive not originally
employed by the firm receiving one or more posi-
tions at the same time as his initial hire is clearly an
outsider, just as an executive who has been with
the firm for a long period of years is clearly an
insider. An executive who had been with a firm for
two years or less before the CEO appointment was
classified as an outsider; the two-year span was
considered a time of grooming for the appoint-
ment to the leadership.
RESULTS
Table 1 shows the correlation coefficients for our
variables. There is considerable correlation; hence,
potential multicollinearity had to be considered.
We computed variance inflation factors, which in-
dicated that multicollinearity was not a problem for
the variables in the regressions whose results ap-
pear in Table 2. As shown in Table 1, the discre-
tionary current accruals are, on average, negative.
Large positive (negative) discretionary current ac-
cruals would imply income-increasing (-decreas-
ing) earnings management.
Table 2 presents the regression results. Although
the amount of variance explained (the adjusted R2s)
seems low, we do not think this is particularly
problematic. Lev (1989) found that a majority of
earnings studies have exhibited low values on this
272 Academy of Management Journal April

TABLE 1
Correlations and Descriptive Statistics for a Sample of 285 Successionsa

Variable Mean s.d. 1 2 3 4 5 6 7

1. Discretionary current accrualsb 0.59% 0.16%

2. CEO/chair dualityc 0.63 0.48 .12*
3. Prior firm performance 0.80% 0.21% .12* .05
4. Outside successionc 0.13 0.34 .01 .07 .08
5. Proportion of outsiders on board 66.72% 16.34% .00 .08 .05 .09
6. Outside director tenure 8.13 3.93 .03 .11* .00 .10* .06
7. Blockholder ownership 11.02% 17.88% .00 .00 .01 .03 .16*** .12*
8. Insider and board ownership 6.80% 12.05% .02 .10 .02 .00 .34*** .12* .10*

a
The successions include 173 dual (CEO and chair) and 112 nondual (CEO-only) successions.
For the duality subsample, the discretionary current accruals average 1.14 percent; for the nonduality subsample, they average 3.12
b

percent. This difference is significant at the .05 level (t 1.99). For firms with prior performance above (below) the median, the
discretionary current accruals average 2.22 percent (1.07%). This difference is significant at .05 (t 1.98).
c
Dichotomous (0, 1) variables where 1 represents outside succession or duality.

p .10
* p .05
*** p .001

statistic. The amounts of variance explained (R2s)
are comparable to those in other earnings studies.
In model 1, we present results for the five control
variables. None of the estimated coefficients are
statistically significant.
For the firms with duality succession announce-
ments, average discretionary current accruals are
1.14 percent, a positive value. For the firms with
nonduality announcements, average discretionary
current accruals are negative, 3.12 percent. The
difference is significant at the .05 level (t 2.05).
Model 2 of Table 2 shows the results of our test of
Hypothesis 1. We added a binary variable taking
the value of 1 when a succession created a dual
position and 0 otherwise. The estimated coefficient
for the duality variable is positive and significant at
the 5 percent level. This finding is consistent with
the predictions of Hypothesis 1.
For firms with prior performance below the me-
dian, the discretionary current accruals average
1.07 percent, and for firms with prior performance
above the median, the accruals average 2.22 per-
cent. This difference is significant at the 5 percent
(t 1.98). In model 3 in Table 2, we included the
variable measuring prior performance to test Hy-
pothesis 2. The estimated coefficient for the prior
firm performance variable is negative and signifi-
cant (at the 5 percent level), consistent with the
predictions of Hypothesis 2. Postsuccession earn-
ings management is greater when there has been
relatively poor prior firm performance.
DISCUSSION
The theoretical contribution of this paper is that
we link impression management and agency the-
ory. Impression management (through earnings
management) can be considered an agency cost if it
leads to nonoptimal decision making by sharehold-
ers. Our first hypothesis was that earnings manage-
ment will be greater following duality-creating suc-
cessions. The unambiguous dual-position leader
may be operating under greater expectations, and
the dual position may give this individual more
authority to adjust financial reports. Given high
expectations for good performance and the strong
authority provided by dual leadership, a CEO-chair
may engage in impression (earnings) management
to show better performance. We argue that although
much of the large body of literature on duality does
not show it to be harmful to overall firm perfor-
mance, under specific conditions duality may ex-
acerbate agency problems between managers and
shareholders.
We found some evidence consistent with the
possibility that the agency costs of duality are sit-
uational. Specifically, we found that companies
whose succession announcements created a dual
leadership structure had greater measurable earn-
ings management than those with successions cre-
ating a nondual structure. If earnings management
exacerbates agency problems, then our results are
consistent with the agency perspective on duality,
since they show greater earnings management for
dual than for nondual CEO successions.
In our second hypothesis, we propose that in-
come-increasing earnings management will be
more likely to occur following poor performance.
Companies that have experienced poor perfor-
mance may have pressure to produce results. Thus,
poor prior performance may be the causal link be-
tween impression management and postsuccession
2004 Davidson, Jiraporn, Kim, and Nemec 273

TABLE 2 the impact of duality, but also into other outcomes

Results of Ordinary Least Square Regression for which agency-based explanations have been
a, b
Analysis made.
Our results suggest that the debate over the im-
Model Model Model
pact of duality on company performance is not
Variable 1 2 3
over. Since our results are not unequivocal, our
Constant 0.00 0.01 0.00 interpretation of them is somewhat provisional and
( 0.06) (0.21) (0.08) may require additional research. Future research
may be necessary to fully measure whether our
Outside successionc 0.00 0.01 0.00
( 0.12) (0.32) (0.11) findings are robust when other control variables are
Proportion of outsiders 0.00 0.00 0.00 added to analyses. In addition, the impact of dual-
on board ity in specific situations with agency-cost implica-
( 0.00) (0.15) ( 0.16) tions may deserve attention.
Outside director tenure 0.00 0.00 0.00
Financial reports are constructed by individuals
(0.58) (0.59) (0.53)
Blockholder ownership 0.00 0.00 0.00 who may be trying to create images of both their
(0.11) (0.21) (0.14) organizations and of themselves as leaders. This
Insider and board 0.00 0.00 0.00 creativity can become problematic (as in the cases
ownership of Enron/Arthur Anderson and WorldCom), and
( 0.35) ( 0.44) ( 0.42)
CEO/chair dualityc 0.04 Congress has even recognized its importance in its
( 2.02)* passage of the Sarbanes-Oxley Act. This act is de-
Prior firm performance 0.00 signed to help reduce earnings management by re-
(2.29)* quiring board and audit committee members to
have financial literacy.
Adjusted R2 0.2% 1.7% 1.6%
Our work is related to the field of ethnostatistics,
a
The dependent variable equals discretionary current accru- the study of how statistics are produced and used
als for a sample of large firms from 1982 through 1992. The (Gephart, 1988). In the case of reporting (and pos-
numbers in parentheses are t-statistics. A variance inflation sibly managing) earnings, it is the study of the
factor (VIF) of 10 or more would indicate serious multicollinear-
ity problems. All of the independent variables in the table have production and use of financial reports for inter-
VIFs of 1.3 or lower. preting firm performance. Financial reports may be
b
Because our data spanned several years, we ran alternative used in an attempt to transform corporate images.
regressions in which a potential year effect was considered. The Corvellec (1997) argued that when there is a ban on
results remained qualitatively similar.
c
Dichotomous (0, 1) variables where 1 indicated outside suc-
outright fabrication of performance results, there is
cession and duality. always room for creativity in recounting those re-
* p .05 sults. He stated, Creativity is an integral part of the
work of developing performance indicators, and we
impression management. We found evidence con- know that financial accounting can prove to be a
sistent with this hypothesis, suggesting that follow- very creative endeavor (Corvellec, 1997). Our
ing firms poor performance, successors may want study is an early step in documenting whether or-
to give the impression of improved performance. ganizational processes and structure relate to cre-
Our findings complement those of Lane, Can- atively reporting performance. It appears that poor
nella, and Lubatkin, who tested agency theory in prior performance and a succession creating a dual
another context. Those authors argued that con- CEO and chair may provide motive and opportu-
flicts of interest between shareholders and manag- nity for managing performance stories in financial
ers do arise in certain situations (1998: 574) but do reports.
not dominate day-to-day management of firms, as Given the relation of our work to ethnostatistics
agency theory would suggest. To measure the costs and our findings that managers may use financial
and benefits of a dual governance structure, future numbers to manage the impressions they give the
research may be needed to examine the impact of financial marketplace, future research into ethnos-
duality in specific situations. For example, Conyon tatistics and financial reporting may produce inter-
and Murphy (2000) found that pay-performance esting findings. Ethnostatistics has three levels that
sensitivity was greater in companies with dual may define an agenda for future research in this
leader governance structures and suggested that area (Gephart, 1988). Level 1 is the study of the
this situational perspective on duality could be ex- production of numbers. Researchers could focus on
tended to other situations. A situational perspec- motivations behind earnings management. Level 2
tive may provide important insights, not only into is the experimental simulation of reporting prac-
274 Academy of Management Journal
tices. Researchers could study the impact of these
managed earnings on the meaning assigned to the
numbers. Finally, level 3 of ethnostatistics con-
cerns the rhetoric contained in the numbers. An
interesting question would be whether rhetoric
changes when there have been earnings increases
caused by earnings management rather than by im-
proved performance.
As in all research, our sampling procedures and
statistical methodologies affect our findings. Our
sample consisted of succession announcements in
large U.S. corporations. Future research may need
to be directed at this issue with a sample of smaller
firms and international firms to determine if the
results are generalizable. Further, our sample pe-
riod ended in 1992. To determine if our results are
generalizable to later time periods, we tested earn-
ings management on a sample of 81 successions in
the years 199799. While the duality successions
still had greater earnings management than the
nondual, the difference was not as significant. The
sensitivity of the results to time period may be due
to the increasing importance placed on corporate
governance since the mid-1990s.
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275
Wallace N. Davidson III (davidson@cba.siu.edu) is the
Rehn Distinguished Research Professor of Finance at
Southern Illinois University at Carbondale. He received
his Ph.D. from The Ohio State University. His research
interests include executive succession and corporate
control.
Pornsit Jiraporn is an assistant professor of finance at
Texas A&M International University in Laredo, Texas. He
received his Ph.D. in finance from Southern Illinois Uni-
versity at Carbondale. His current research focuses on
corporate governance, earnings management, and corpo-
rate restructurings.
Young Sang Kim is an assistant professor of finance at
Quinnipiac University. He received his Ph.D. in finance
from Southern Illinois University at Carbondale. His cur-
rent research interests include agency theory, financial
management, corporate diversification, and risk manage-
ment.
Carol Nemec is an associate professor at the Southern
Oregon University School of Business. She received her
DBA in finance from Southern Illinois University. Her
research interests include corporate governance and the
roles of minorities and outsiders on boards of directors.