Managerial Ability and Value Relevance of Earnings

China Accounting and Finance Review, Forthcoming

60 Pages Posted: 5 Mar 2020

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Ibrahim Siraj

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Date Written: January 14, 2020

Abstract

We examine how management ability affects the extent to which capital markets rely on earnings to value equity. Using a measure of ability that captures a management team’s capacity of generating revenues with a given level of resources compared to other industry-peers, we find a strong positive association between managerial ability and the value relevance of earnings. Additional tests show that our results are robust to controlling for earnings attributes and investment efficiency. We use propensity score matching and 2-SLS instrumental variable approaches to deal with the issue of endogeneity. For further identification, we examine CEO turnover and find that newly hired CEOs with better managerial abilities than the replaced CEOs increase value relevance of earnings. We identify weak corporate governance and product market power as the two important channels through which superior management practices play important role in the corporate decision-making process that positively influence the value relevance of earnings. Overall, our findings suggest that better managers make accounting information significantly more relevant in the market valuation of equity.

Keywords: Managerial Ability, Value Relevance, Corporate Governance, Market Power

JEL Classification: M41, M12

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Siraj, Ibrahim and Wu, Qiang, Managerial Ability and Value Relevance of Earnings (January 14, 2020). China Accounting and Finance Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3519263

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Qiang Wu (Contact Author)

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

No contact information is available for Ibrahim Siraj

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