How Does Intentional Earnings Smoothing Vary with Managerial Ability?

Forthcoming in the Journal of Accounting, Auditing & Finance

41 Pages Posted: 19 Apr 2014 Last revised: 20 Dec 2017

See all articles by Peter R. Demerjian

Peter R. Demerjian

University of Washington - Michael G. Foster School of Business

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Sarah E. McVay

University of Washington

Date Written: December 19, 2017

Abstract

We investigate if high-ability managers are more likely to intentionally smooth earnings, a form of earnings management, and when they are more likely to do so. Although prior studies provide evidence that high-ability managers report higher quality earnings, the literature does not indicate whether this behavior is common because of (or happens in spite of) high-ability managers’ intentional smoothing activities. We find that (1) high-ability managers are significantly more likely to engage in intentional smoothing, (2) their intentional smoothing is associated with improved future operating performance, and (3) their intentional smoothing is more prevalent when the smoothing either benefits shareholders, the manager, or both. We do not, however, find evidence that high-ability managers who smooth are more likely to have engaged in informed trading or are more likely to consume perquisites. High-ability managers’ intentional smoothing is also associated with increased voluntary (but not forced) executive turnover, consistent with high-ability managers being motivated, at least in part, by how the capital market consequences of smoothing are expected to benefit shareholders, thereby bolstering their reputation.

Keywords: Managerial ability, earnings smoothing, discretionary reporting, beneficial earnings management, real earnings management

JEL Classification: M40, M41, M43

Suggested Citation

Demerjian, Peter R. and Lewis-Western, Melissa Fay and McVay, Sarah E., How Does Intentional Earnings Smoothing Vary with Managerial Ability? (December 19, 2017). Forthcoming in the Journal of Accounting, Auditing & Finance. Available at SSRN: https://ssrn.com/abstract=2426313 or http://dx.doi.org/10.2139/ssrn.2426313

Peter R. Demerjian

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Melissa Fay Lewis-Western (Contact Author)

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Sarah E. McVay

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

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