Trust, but Verify : Managerial Ability and Conditional Accounting Conservatism

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.