The Effect Of CEO Change On Information Asymmetry

Abstract

This study investigated the relationship between CEO changes and information asymmetry. In the first year after a CEO change, management ability is evaluated in an atmosphere of high pressure and scrutiny regarding company performance. In such circumstances, CEOs selectively disclose information in an effort to inflate their performance evaluation. In addition, new CEOs influence not only management decisions, but also information disclosure strategies related to both financial and nonfinancial information. Therefore, the motivations of new CEOs regarding information disclosure can increase information asymmetry, and financial analysts must put extra effort toward reducing this asymmetry. This study measured information asymmetry by the unfaithful disclosure firm designation and analyst forecast errors. The sample is composed of firms active in the Korea Composite Stock Price Index (KOSPI) from 2006 to 2009. We found that there is a significant positive relationship between CEO change and information asymmetry as measured by unfaithful disclosure firm designation and analyst forecast errors. These results imply that CEO turnover increases information asymmetry due to managers’ intentional efforts to reduce the level of available information.