A study of big bath practices in the Egyptian capital market: an emphasis on CEO turnover and origin

Abstract

Purpose This study aims to investigate how major big bath accounting practices and CEO turnover in Egypt relate to one another, as well as the first to use the CEO’s origin as a moderating factor. Design/methodology/approach This study uses 10-year longitudinal data from 2012 to 2021 and 290 firm-year observations from Egypt’s listed nonfinancial firms that witnessed CEO turnover to identify the significant big bath accounting practices in Egyptian businesses after the Egyptian revolution and the COVID-19 pandemic. Using fixed and random effect models, the authors investigate the impact of CEO turnover on company earnings during the first year of a newly appointed CEO as an indicator of big bath practices after controlling CEO gender, experience, firm size, leverage, return on assets, return on equity and industry. The hypotheses were investigated using static panel data. Findings The results show the presence of big bath practices in the Egyptian market. Furthermore, big bath accounting practices are positively correlated with CEO turnover. Moreover, the results indicate that big bath accounting practices are only endured when external CEOs are employed, rather than internal ones. Research limitations/implications The sample size and availability of data are the main research limitations. In addition, this study only examined CEO turnover and CEO origin as moderators in big bath accounting. Thus, future research may consider other CEO characteristics and political factors associated with big bath practices. Practical implications The findings from this study offer valuable insights to investors and regulators for effective decision-making and governance practices within the Egyptian capital market, while also contributing to a more informed approach to emerging markets on a global scale. Originality/value The findings contribute to the big-bath and CEO turnover and origin literature by showing a lower ceiling for earnings manipulation and using Egypt as a case study due to its unique institutional environment.