Managerial Horizons, Accounting Choices and Informativeness of Earnings

32 Pages Posted: 28 May 1999

See all articles by Albert L. Nagy

Albert L. Nagy

John Carroll University

Kathleen Blackburn Norris

University of Tennessee

Richard A. Riley

West Virginia University - Department of Accounting and Management Information Systems

Abstract

Prior research has demonstrated that in companies with low managerial ownership managers exploit the latitude available in generally accepted accounting principles to alleviate contractual constraints, presumably to ensure job preservation (annual salary) and maximize incentive compensation (annual bonus). The result is accounting information that is less informative in low managerial ownership companies compared to companies with higher levels of managerial ownership. We hypothesize that in companies with low managerial ownership, higher levels of stock ownership relative to annual salary and bonus (i.e., the ratio of the market value of managerial ownership to annual compensation) mitigate managerial incentives to exploit accounting choices. Our findings are consistent with this hypothesis and suggest that greater managerial wealth tied to the long-term performance of the company through stock ownership versus short-term performance horizons (annual salary and bonus) results in more informative accounting earnings and lower discretionary accounting accrual adjustments in low managerial ownership companies.

JEL Classification: M41, M43, J33

Suggested Citation

Nagy, Albert L. and Blackburn Norris, Kathleen and Riley, Richard A., Managerial Horizons, Accounting Choices and Informativeness of Earnings. Available at SSRN: https://ssrn.com/abstract=166096 or http://dx.doi.org/10.2139/ssrn.166096

Albert L. Nagy

John Carroll University ( email )

School of Business 20700 North Park Boulevard
Cleveland, OH 44118
216-397-4393 (Phone)
216-397-3063 (Fax)

Kathleen Blackburn Norris

University of Tennessee ( email )

College of Business Administration 916 Volunteer Boulevard
Knoxville, TN 37996
United States
423-974-1754 (Phone)
423-974-4631 (Fax)

Richard A. Riley (Contact Author)

West Virginia University - Department of Accounting and Management Information Systems ( email )

Morgantown, WV 26506
United States
304-293-7849 (Phone)
304-293-0635 (Fax)

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