Are Entrenched Managers’ Accounting Choices More Predictive of Future Cash Flows?

18 Pages Posted: 5 May 2017

See all articles by Bradley E. Lail

Bradley E. Lail

Baylor University

Gregory W. Martin

University of North Carolina (UNC) at Charlotte - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: May/June 2017

Abstract

We examine the role manager entrenchment has on firms’ financial reporting quality. More specifically, we test whether entrenched managers’ reported accruals deviate from industry norms and whether entrenched managers’ abnormal accruals are more (or less) predictive of future cash flows. Consistent with implications from prior research, we find that firms with entrenched managers generally report lower levels of abnormal accruals (in an absolute sense), but the abnormal accruals utilized by entrenched managers are more predictive of future cash flows. Contrary to a more traditional view of manager entrenchment, our evidence suggests that entrenched managers report higher quality abnormal accruals. While prior research provides evidence that manager entrenchment is associated with negative economic outcomes, we argue that attempts to limit entrenchment are unlikely to improve financial reporting quality and may actually lower quality. Future corporate governance research should consider not only the level but also the quality of the association between accounting choices and manager entrenchment.

Keywords: management entrenchment, shareholder rights, financial reporting quality, abnormal accruals

Suggested Citation

Lail, Bradley E. and Martin, Gregory W., Are Entrenched Managers’ Accounting Choices More Predictive of Future Cash Flows? (May/June 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 5-6, pp. 593-610, 2017, Available at SSRN: https://ssrn.com/abstract=2962707 or http://dx.doi.org/10.1111/jbfa.12247

Bradley E. Lail (Contact Author)

Baylor University ( email )

One Bear Place #98002
Waco, TX 76798
United States

Gregory W. Martin

University of North Carolina (UNC) at Charlotte - Department of Accounting ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

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