Do High Ability Managers Smooth Earnings to Signal Private Information?

• In Event: Managerial discretion in financial reporting
  In Paper Session: Managerial Discretion in Financial Reporting

Abstract

In this study, we investigate whether managerial ability is related to income smoothing and if so, whether smoothing associated with managerial ability is informative about future earnings. Using a sample of firms for the period of 1991-2009, we find that discretionary smoothing by high ability managers is greater than that by low ability managers and that this relation is more pronounced for firms with high information asymmetry. More importantly, we show discretionary smoothing is useful in predicting future earnings only when employed by high ability managers in firms that face high levels of information asymmetry. Overall, our results suggest that high ability managers smooth earnings to signal their private information. Our study should be of interest to researchers, practitioners, and others concerned with understanding the determinants and usefulness of smoothing.

Authors

• bok baik, Seoul National University

• Sunhwa Choi, Lancaster University

• David B Farber, The University of Texas at El Paso