Managerial Ability and the Quality of Firms' Information Environment

Journal of Accounting, Auditing & Finance, Vol. 33, No. 4, October 2018, pp. 506-527

40 Pages Posted: 20 Nov 2019

See all articles by Bok Baik

Bok Baik

Seoul National University

Paul Brockman

Lehigh University - College of Business

David B. Farber

Indiana University Kelley School of Business Indianapolis

Sam (Sunghan) Lee

Iowa State University; Iowa State University - Department of Accounting and Finance

Date Written: October 6, 2017

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

Suggested Citation

Baik, Bok and Brockman, Paul and Farber, David B. and Lee, Sam (Sunghan), Managerial Ability and the Quality of Firms' Information Environment (October 6, 2017). Journal of Accounting, Auditing & Finance, Vol. 33, No. 4, October 2018, pp. 506-527, Available at SSRN: https://ssrn.com/abstract=3484190

Bok Baik

Seoul National University ( email )

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

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

David B. Farber (Contact Author)

Indiana University Kelley School of Business Indianapolis ( email )

801 W Michigan Ave
Indianapolis, IN 46202
United States

Sam (Sunghan) Lee

Iowa State University ( email )

Gerdin Building 3323
Ames, IA 50010
United States

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

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