The Effect of Top Management Team Turnover on Financial Reporting Risk

• In Event: Management and the Board

Abstract

Upper echelon theory posits that defining, executing, and overseeing an organization’s strategy is
a shared activity among top executives. Based upon this perspective, we expect turnover among
the members of a firms’ top management team (TMT) to result in significant disruption to an
organization’s operations, leading to greater uncertainty regarding its future performance,
execution of operational strategies, and financial reporting decisions. In this study, we explore
whether TMT turnover affects stakeholders’ perceptions of financial reporting risk. We find that TMT turnover is positively associated with audit fees which reflects auditors’ and audit committees’ assessments of financial reporting risk. Further, we find that TMT turnover’s effect on audit fees is greater for companies headquartered where there are more limited local labor pools, and companies that are market leaders in their local areas or industries. Further analyses suggest that increased audit fees offset deterioration in financial reporting quality as TMT turnover
increases.

Authors

• Kenneth L Bills, Michigan State University

• Michelle Harding, Virginia Tech

• Timothy Andrew Seidel, Brigham Young University

• Jonathan Truelson, Virginia Polytechnic Institute and State University