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Managerial ability and accounting conservatism

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  • Haider, Imran
  • Singh, Harjinder
  • Sultana, Nigar

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.

Suggested Citation

  • Haider, Imran & Singh, Harjinder & Sultana, Nigar, 2021. "Managerial ability and accounting conservatism," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    • Handle: RePEc:eee:jocaae:v:17:y:2021:i:1:s1815566920300564
    DOI: 10.1016/j.jcae.2020.100242
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    2. Rawan Atwa & Safaa Alsmadi & Buthiena Kharabsheh & Ruwaidah Haddad, 2023. "Do CEO Attributes Spur Conservatism?," IJFS, MDPI, vol. 11(1), pages 1-15, March.
    3. Ben Abdesslem, Rim & Chkir, Imed & Dabbou, Halim, 2022. "Is managerial ability a moderator? The effect of credit risk and liquidity risk on the likelihood of bank default," International Review of Financial Analysis, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Managerial ability; Accounting conservatism; Earnings quality;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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