Managerial Operating Ability and the Association between Accruals and Future Cash Flows

• In Event: Management Accounting

Abstract

We investigate whether individual manager’s operating ability, operationalized as the extent to which an individual manager utilizes the company’s assets efficiently to generate profits, explains the mapping between accruals and future cash flows. While this mapping can be driven by both the quality of accounting measurement and the manager’s operating ability, there is little empirical evidence on the latter. We find that the association between current period accruals and future cash flows is stronger when the manager has superior operating ability. This supports Dechow et al.’s claim (2010) that the association between current accruals and future cash flows is determined by not only the quality of accounting judgment, but also the actual firm performance due to individual manager ability.

Author

• Sam Han, Korea University