Managerial Ability and Accounting Conservatism

• In Event: Financial Accounting and Reporting 10

Abstract

In this study, we investigate whether managerial ability is associated with accounting conservatism and how demand for accounting conservatism affects the association. Using a sample of firms for the period of 1988-2012, we find that firms with high ability managers are less likely to use conservative accounting. More importantly, we show that the association becomes weaker when firms are highly leveraged. Overall, our result suggests that high ability managers are more likely to resolve uncertainty in their performance by their operational ability so that they have less incentive to use conservative accounting. In addition, although managerial ability could be a substitute for conservative accounting to some extent, conservatism is still a useful mechanism to alleviate information asymmetry, especially when demand for conservatism is higher.

Author

• Sam Han, Korea University