The effect of managerial ability on earnings quality in the pre and. Section 4 reports the results of my two hypotheses and provides robustness tests which examine the managerial ability have positive effect on the value of cash. Earnings quality is not associated with managerial ability. Jul 22, 2019 the purpose of this paper is to emphasize the relationship between managerial ability, earnings management, internal control quality and audit fees to establish whether or not there is a significant relationship between the variables of managerial ability, earnings management, internal control quality and the audit fees. The effect of managerial ability on earnings quality in. Secondly, foreign ownership has no\ud effect on the earnings quality, but it has a negative and significant effect on the value of the firm.
The results show that in the face of increased competition, high quality managers manipulate earnings via accruals rather than more costly real earnings management. This research contributes to enrich the earnings quality literature, especially about the role of managers, which is managers are not the absolute profit management actors, but capable managers create efficiency and improve earnings quality. Section 3 presents my research design and describes our sample and main variables. We propose a measure of managerial ability, based on managers efficiency in generating revenues. Our main measure of managerial ability hereafter, the mascore is developed in demerjian et al. Review of quantitative finance and accounting, 514, 10331069. We find that earnings quality is positively associated with managerial ability. The reason for this is that earnings information is a critical item in the decisionmaking models of investors. The purpose of this paper is to study the influence of managerial ability on the quality of their financial reporting.
Dec 22, 2019 earnings management em and earnings quality eq can be considered two related challenging issues in financial reporting as em is an aspect influencing eq. Managerial ability and the quality of firms information. Pdf managerial ability and earnings quality diaz adi. Managerial ability and earnings quality created date.
We identify managerspecific effects by creating a measure of managerial ability using frontier analysis and separating managerspecific from firmspecific effects by following managers across firms. Managerial ability, earnings management, earnings quality, accruals quality. We find that earnings quality is positively associated with managerial. To test the relation between managerial ability and earnings quality, as well as the interactive effect of a countrys investor protection mechanisms on this relation, we use demerjian et al. Specifically, more able managers are associated with fewer subsequent restatements, higher.
Yet, ironically, there are deep disagreements about to define earnings quality or to measure it. Managerial ability and earnings quality by peter r. Managerial ability, information quality, and the design and. The relationship between audit fees and earnings quality of. How does intentional earnings smoothing vary with managerial. Using a large bank sample from nine different countries and for the time period 20042010, we expect that bank earnings quality and accounting conservatism increase with more able managers that disclose more accurate earnings and who report higher information about banks. Firms with better management ability invest more during the crisis period, generate greater profitability and issue more debt when profitability is not adequate. Many of the factors associated with earnings quality, such as. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. Although prior studies provide evidence that highability managers report higher quality earnings, the literature does not indicate whether this behavior is common because of or happens in spite of highability managers intentional smoothing activities.
By using path analysis method, the results show that the\ud managerial ability has positive and significant effect on the earnings quality and the value of the firm. Managerial ability and earnings quality university of washington. Managerial ability is measured using data envelopment analysis dea. We find that managerial ability increases the sensitivity of dividends to the dividend tax penalty. Does managerial ability improve value of cash holdings. We also examine restatements as ex post evidence of earnings management. Earning quality in this survey consists of three parts of quality of accruals, earnings and earnings forecast persistence. They define managerial ability as how efficiently managers generate revenues from given economic resources, and find that managerial ability is positively related to firm performance and earnings quality. Earnings management, management compensation, managerial. Managers can make discretionary accounting choices that are regarded as a practice of either efficient communication of private information or distorting disclosure. Managerial ability and firm performance in malaysia.
Earnings quality and earnings management springerlink. Thus, earnings quality can vary because of the individual cfos employed. In addition, the positive association between managerial ability and the shareholder tax sensitivity of dividends decreases in institutional ownership. We examine the relation between managerial ability and earnings quality. Introduction we examine the relation between managerial ability and earnings quality. Pdf managerial ability and earnings quality semantic. Pdf managerial ability and earnings quality semantic scholar. We find that earnings quality is positively associated with. Managerial ability, managerial efficiency, earnings quality.
Jul 28, 2010 we examine the relation between managerial ability and earnings quality. We anticipate that superior managers are more knowledgeable of their business, leading to better judgments and estimates and thus higher quality earnings. Pdf managerial ability and earnings quality researchgate. To measure managerial ability, we use the mascore developed in. During the past few years, there have been many studies on measuring the effects of managerial ability on profitability. Earnings persistence and earnings predictability are used to measure financial. Managerial ability and monitoring structure as a mechanism. Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and higher quality accrual. In thebanking industry, bank managers have the ability to manage earnings through loan portfolio quality beaver and engel 1996. Managerial ability and earnings management peter demerjian. Jan 30, 2018 we examine the impact of managerial ability on the shareholder tax sensitivity of dividends. Pruthi, s 2014 social ties and venture creation by returnee entrepreneurs. We find that earnings quality, measured by the extent that accruals map into cash flows, is increasing with managerial ability.
Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and higher quality accrual estimations. Introduction earnings quality is a fundamental concept. The effect of managerial ability towards earning quality with. However, given that there are both significant benefits and costs associated.
Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and. In this study, we examine the relation between managerial ability and the quality of a firms information environment. Managerial ability and real earnings management sciencedirect. In particular, we find evidence that better managers manage earnings more successfully, experiencing fewer negative outcomes such as lower sales or future financial restatements. Therefore, firms with poor earnings quality may have a higher cost of equity. Emory university university of utah new york university. Demerjian, lev and mcvay 2006 examine the relation between managerial ability and earnings quality.
It examines the effect of market competition on the relationship between managerial ability and earnings management. So not only do individual managers affect the financial reporting of the firm, but this effect is systematic. Managerial ability and earnings quality peter demerjian emory university melissa lewis university of utah baruch lev new york university sarah mcvay university of utah november 7, 2011 abstract we examine the relation between managerial ability and earnings quality. The results of our survey have indicated that managerial ability influences positively on earning quality. It remains, however, that earnings management will. Managerial ability and credit ratings wiley online library.
The relationship between managerial ability, earnings. We find that higher ability alters the balance of informationsensitive covenants demanded by outside investors, increases the issuance of bonds with longer maturity, and decreases the issuance of senior secured debt. Measuring the effect of managerial ability on earning quality. We find that managerial ability is positively associated with firm performance. Petkevich, a and a prevost 2018 managerial ability, information quality, and the design and pricing of corporate debt. The effect of managerial ability on earnings quality in the. This measure is not a direct measure of earnings management, but. We examine the relation between managerial ability and firm performance during the 2008 global financial crisis. Pdf we examine the relation between managerial ability and earnings quality. The effect of managerial ability on financial reporting quality eudl. Given our results regarding the relation between managerial ability and real activities manipulations, it would be interesting to investigate how managerial ability influences the choice of earnings management.
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