Managerial Ability and Value Relevance of Accounting Information

• In Event: Topics in Management Accounting

Abstract

Using the measure of managerial ability developed by Demerjian et al. (2012), we find that value relevance of accounting information is positively associated with management quality. To account for the endogeneity problem from possible relationship between past performance of firms and current market perception of management quality, we employ an empirical strategy of testing value relevance of subsamples firms experiencing similar types of transition in management ability from previous period to current period. We find that the firms which are rather persistent being in the group of higher management ability are likely to experience stronger value relevance of earnings than firms underwent through any other types of transition or no transition. Furthermore, we document that the differences in adjusted R2 between firm-years belonging to the highest decile of management ability and firm-years experiencing decrease in ranking from being in the highest decile in the previous period could be ranged from 4 to 10 percentage points. Moreover, value relevance increasing role of managerial ability is predominant for single-segment firms and for diversified firms with unrelated segments.

Authors

• Ibrahim M Siraj, Rensselaer Polytechnic Institute

• Qiang Wu, Rensselaer Polytechnic Institute

• Iftekhar Hasan, Fordham University and Bank of Finland