Earnings Management and CEO Turnoverin Korean Credit Unions

This study empirically tests whether and how CEOs of credit unions manage their reported earnings through management of allowance for bad debts (ABD) by examining distinct features of credit unions. With regard to the common ties of their members on which the unions are established, it tests whether credit unions’ earnings management differs by type of establishment ties. Then, because the CEOs of unions and their number of terms of office are determined by the direct election by their members, the study examines how earnings management is affected by the existence of the election. The study uses a specific accruals approach widely used in the literature on earnings management of financial companies. It uses bad debt expense (BDE), a major discretionary item, as the dependent variable and non－discretionary earnings as a primary explanatory variable to test the hypotheses. The sample comprises 7,445 Korean credit union firm－years spanning 2006 to 2015. The empirical results revealed that credit unions manage their reported earnings by using BDE, especially more in the first office term of their CEOs than in the consecutive term, and in the last year of the first term, and that earnings were more actively managed in regional unions than in association ones. This study provides policy implications. Financial supervisory authorities should improve the objectivity and clarity of asset soundness criteria, and provide better and objective estimation methods for expected loan recovery so as to minimize CEOs’ discretion in earnings management. They should also provide differential supervision for credit unions depending on their types of common ties and size.