Managerial ability and accounting conservatism

Imran Haider, Harjinder Singh and Nigar Sultana

Journal of Contemporary Accounting and Economics, 2021, vol. 17, issue 1

Abstract: Since accounting conservatism is a measure of biased reporting which may or may not reflect high quality earnings, the relation between managerial ability and accounting conservatism is unclear ex ante. High-ability managers may report conservatively to improve the efficiency of contracts, avoid agency conflicts by the timely reporting of future losses, and build reputations for conservative reporting. Conversely, they may not report conservatively to the extent that conservatism reflects biased, and consequently, low-quality earnings. Motivated by these opposing arguments, we examine the relationship between managerial ability and conservatism for Australian firms for the period 2004 to 2013. Our results show that managerial ability is positively associated with accounting conservatism. These results support the notion that high ability managers apply conservatism in accounting because it benefits the firm and stakeholders. Our results are robust to a wide range of proxies for both managerial ability and conservatism, including the Heckman’s (1976) self-selection bias check. Our study should be of interest to numerous stakeholders, including firms seeking to make managerial appointments.

Keywords: Managerial ability; Accounting conservatism; Earnings quality (search for similar items in EconPapers)
JEL-codes: G32 M41 M48 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:17:y:2021:i:1:s1815566920300564

DOI: 10.1016/j.jcae.2020.100242

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