Managerial Ability and Revenue-Expense Matching: Accrual Estimation versus Business Decision

Abstract

We investigate the association between managerial ability and revenue-expense matching. We find that firms having managers with better ability exhibit better contemporaneous revenue-expense matching because more capable managers estimate accruals more accurately and select the projects with smaller early cash outflows. On the other hand, the relation between current revenue and past expense is weaker for such firms. These findings are attributable to both accrual estimations and project selections, former effect being stronger than the latter. Our study indicates that the relation between managerial ability and earnings attribute could be a function of accrual estimation process as well as project selection

Keywords: managerial ability, revenue-expense matching, accrual estimation, project selection

JEL Classification: G32