Yet, ironically, there are deep disagreements about to define earnings quality or to measure it. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. We examine the relation between managerial ability and earnings quality. The reason for this is that earnings information is a critical item in the decisionmaking models of investors. 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. We find that managerial ability increases the sensitivity of dividends to the dividend tax penalty. Managerial ability and credit ratings wiley online library. Managerial ability, information quality, and the design and. We propose a measure of managerial ability, based on managers efficiency in generating revenues. Managerial ability and earnings quality created date. 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. Pdf managerial ability and earnings quality diaz adi. So not only do individual managers affect the financial reporting of the firm, but this effect is systematic.
Does managerial ability influence the quality of financial. The purpose of this paper is to study the influence of managerial ability on the quality of their financial reporting. The results of our survey have indicated that managerial ability influences positively on earning quality. Many of the factors associated with earnings quality, such as. We find that earnings quality, measured by the extent that accruals map into cash flows, is increasing with managerial ability. To measure managerial ability, we use the mascore developed in.
Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and. Introduction earnings quality is a fundamental concept. However, given that there are both significant benefits and costs associated. 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. Therefore, firms with poor earnings quality may have a higher cost of equity. In particular, we find evidence that better managers manage earnings more successfully, experiencing fewer negative outcomes such as lower sales or future financial restatements. The effect of managerial ability on earnings quality in the. In addition, the positive association between managerial ability and the shareholder tax sensitivity of dividends decreases in institutional ownership.
Demerjian, lev and mcvay 2006 examine the relation between managerial ability and earnings quality. Managerial ability and earnings management peter demerjian. Secondly, foreign ownership has no effect on the earnings quality, but it has a negative and significant effect on the value of the firm. Review of quantitative finance and accounting, 514, 10331069. During the past few years, there have been many studies on measuring the effects of managerial ability on profitability. We find that managerial ability is positively associated with firm performance. Managerial ability and the choice of earnings management.
We find that earnings quality is positively associated with managerial ability. Thus, earnings quality can vary because of the individual cfos employed. The relationship between audit fees and earnings quality of. We find that earnings quality is positively associated with. Pdf we examine the relation between managerial ability and earnings quality.
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. In this study, we examine the relation between managerial ability and the quality of a firms information environment. We refer to the mapping of accruals into cash flows when describing earnings quality following dechow and dichev, 2002. 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. Introduction we examine the relation between managerial ability and earnings quality. Earnings quality is not associated with managerial ability. The audit committee strengthens the effect of managerial ability towards earnings quality. Jan 30, 2018 we examine the impact of managerial ability on the shareholder tax sensitivity of dividends. The effect of managerial ability on financial reporting quality eudl. It remains, however, that earnings management will. 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. Managerial ability and firm performance in malaysia. We anticipate that superior managers are more knowledgeable of their business, leading to better judgments and estimates and thus higher quality earnings. Managerial ability is measured using data envelopment analysis dea.
Earning quality in this survey consists of three parts of quality of accruals, earnings and earnings forecast persistence. Managerial ability and earnings quality university of washington. Section 3 presents my research design and describes our sample and main variables. We also examine restatements as ex post evidence of earnings management. In thebanking industry, bank managers have the ability to manage earnings through loan portfolio quality beaver and engel 1996. We find that earnings quality is positively associated with managerial. 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. 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.
Firms with better management ability invest more during the crisis period, generate greater profitability and issue more debt when profitability is not adequate. 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. 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. Pdf managerial ability and earnings quality semantic. How does intentional earnings smoothing vary with managerial. Petkevich, a and a prevost 2018 managerial ability, information quality, and the design and pricing of corporate debt. Jul 28, 2010 we examine the relation between managerial ability and earnings quality. 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. Specifically, more able managers are associated with fewer subsequent restatements, higher.
Pdf managerial ability and earnings quality semantic scholar. Managerial ability, earnings management, earnings quality, accruals quality. Dec 23, 2017 we examine if managerial ability affects the efficiency of the contracting environment with lenders. We examine the relation between managerial ability and firm performance during the 2008 global financial crisis. Our main measure of managerial ability hereafter, the mascore is developed in demerjian et al. Pdf managerial ability and earnings quality researchgate. Earnings quality and earnings management springerlink. Measuring the effect of managerial ability on earning quality. The effect of managerial ability on earnings quality in. Does managerial ability improve value of cash holdings. It examines the effect of market competition on the relationship between managerial ability and earnings management. Managerial ability and real earnings management sciencedirect. Managerial ability and earnings quality by peter r. Earnings persistence and earnings predictability are used to measure financial.
This measure is not a direct measure of earnings management, but. Managerial ability and the quality of firms information. The effect of managerial ability towards earning quality with. 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.
Managerial ability and monitoring structure as a mechanism. 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. Emory university university of utah new york university. 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. Earnings management, management compensation, managerial. Essentially, if an accrual never results in cash, that accrual is of poor quality. The effect of managerial ability on earnings quality in the pre and. 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. Managers can make discretionary accounting choices that are regarded as a practice of either efficient communication of private information or distorting disclosure. Managerial ability, managerial efficiency, earnings quality.
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