Managerial Ability and Income Smoothing

The Accounting Review, Forthcoming (DOI/10.2308/accr-52600)

47 Pages Posted: 23 Oct 2019

See all articles by Bok Baik

Bok Baik

Seoul National University

Sunhwa Choi

Sungkyunkwan University

David B. Farber

Indiana University Kelley School of Business Indianapolis

Date Written: August 5, 2019

Abstract

In this study, we investigate whether managerial ability is related to income smoothing and, if so, whether smoothing associated with managerial ability improves the informativeness of earnings and stock prices about future performance. Using a large sample of firms, we find that managerial ability is positively related to smoothing. More importantly, we show that high ability managers incorporate more forward-looking information about cash flows into current earnings through smoothing, thereby enhancing earnings informativeness. We also find that smoothing associated with high ability managers improves stock price informativeness about future cash flows. Our study should be of interest to researchers, practitioners, and others concerned with understanding the determinants and usefulness of smoothing.

Keywords: Income Smoothing, Managerial Ability, Earnings Informativeness, Signaling

Suggested Citation

Baik, Bok and Choi, Sunhwa and Farber, David B., Managerial Ability and Income Smoothing (August 5, 2019). The Accounting Review, Forthcoming (DOI/10.2308/accr-52600), Available at SSRN: https://ssrn.com/abstract=3469415

Bok Baik

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Sunhwa Choi (Contact Author)

Sungkyunkwan University ( email )

Sunkyunkwan University Business School
25-2, Sungkyunkwan-ro, Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)

David B. Farber

Indiana University Kelley School of Business Indianapolis ( email )

801 W Michigan Ave
Indianapolis, IN 46202
United States

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