Trust, but Verify: Managerial Ability and Conditional Accounting Conservatism

Shibashish Mukherjee (), Shuo Wang and Mustafa Reha Okur
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Shibashish Mukherjee: EM - EMLyon Business School
Shuo Wang: The University of Edinburgh
Mustafa Reha Okur: IUE - Izmir University of Economics

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Abstract: High-ability managers' performance track records and "integrity" culture foster capital providers' trust and reduce career risks, allowing them to set the firm's financial reporting policies. Employing this discretion, high-ability managers are likely to report less conditionally conservative earnings. Data from S&P 1500 U.S. firms between 1996 and 2017 support this conjecture. Additional analysis continues to suggest that high-ability managers lower conditional accounting conservatism under limited boundary conditions. We also document that some high-ability managers misuse their financial reporting discretion opportunistically. Despite this, using a two-stage method, we show that our proposed theoretical mechanism—firms with a stronger corporate integrity culture, which promotes trust—enables high-ability managers to report less conditionally conservatively. This study contributes to the research on accounting conservatism and managerial behavior, cautioning capital providers against placing excessive trust in high-ability managers, as in some cases, that trust has been found to be misplaced.

Keywords: corporate integrity culture; managerial career concern; financial reporting; conditional accounting conservatism; managerial ability (search for similar items in EconPapers)
Date: 2025-07-30
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Published in Accounting Horizons, inPress, 22 p. ⟨10.2308/HORIZONS-2023-168⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05196645

DOI: 10.2308/HORIZONS-2023-168

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