Managerial Ability and the Quality of Firms' Information Environment

Abstract

In this study, we examine the relation between managerial ability and the quality of a firm’s information environment. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. However, our understanding of the impact of managerial ability on a firm’s broader information environment is incomplete because it captures more than these specific financial reporting disclosures. Using a composite index based on various proxies for a firm’s information environment, we find a positive relation between managerial ability and a firm’s information environment. Consistent with our argument that managers’ equity incentives improve disclosure quality, we find that the quality of a firm’s information environment improves when managers have higher levels of equity incentives. Additionally, we show that even when governance is weak, higher ability managers refrain from rent extraction. We contribute to the literature by providing more complete and conclusive evidence about the impact of managerial ability on a firm’s broader information environment.

Keywords: information environment, managerial ability, equity incentives, disclosure quality, rent extraction

JEL Classification: M41