CEO Turnover and Narrative Disclosure

Abstract

　In this paper, we empirically examine the effect of CEO turnover on changes in narrative disclosure. Using MD&A, risk factors, and issues to be addressed that are included in the securities report disclosed by Japanese listed non-financial firms, we find that CEO turnover is significantly correlated with changes in narrative disclosure. Specifically, we find that the stickiness decreases, the readability improves, and the tone becomes positive following CEO turnover. Such changes are more pronounced in the year following the change, in which there is sufficient time for the new CEO to have a substantial impact on the company’s narrative disclosure procedures. Furthermore, we find that the effect of CEO turnover on changes in narrative disclosure differs depending on the CEO’s characteristics and the section in which narrative information is disclosed. The results imply that management communicates with investors by using narrative disclosure in securities reports.