A big bath is an accounting term that is defined by a company's management team knowingly manipulating its income statement to make poor results look even worse in order to make future results appear better. It is often implemented in a relatively bad year so that a company can enhance the next year's earnings in an artificial manner.
A big bath is so named because it is like wiping the slate clean. A big bath accounting manoeuvre can result in a big rise in apparent future earnings, which might result in a larger bonus for executives, giving them the incentive to pursue a big bath accounting manoeuvre.
New CEOs sometimes use the big bath so that they can blame the company's poor performance on the previous CEO and take credit for the next year's improvements.
Because stocks trade on earnings, an adverse earnings report may cause significant depreciation in a stock. When earnings are positively affected by the big bath in the future, the stock price can recover and trade even higher than it otherwise would have without the accounting manipulation. A big bath is not necessarily illegal because it can be done effectively within the boundaries of current accounting rules; however, it is seen as unethical.