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
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: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
The Misrepresentation of Earnings
By Ilia D. Dichev, John R. Graham, ...
-
By Mary E. Barth, Wayne R. Landsman, ...
-
Individual Large Shareholders, Earnings Management, and Capital Market Consequences
By Yiwei Dou, Ole-kristian Hope, ...
-
By Ole-kristian Hope, Wayne B. Thomas, ...
-
Accrual Reversals and Cash Conversion
By Matthew J. Bloomfield, Joseph J. Gerakos, ...
-
The Changing Implications of Research and Development Expenditures for Future Profitability
By Asher Curtis, Sarah E. Mcvay, ...
-
Blockholder Exit Threats and Financial Reporting Quality
By Yiwei Dou, Ole-kristian Hope, ...
-
Stock Prices and Earnings: A History of Research
By Patricia M. Dechow, Richard G. Sloan, ...