Browse > Article
http://dx.doi.org/10.14400/JDC.2020.18.6.157

The effect of managerial ability on income smoothing  

Lee, Eun-Ju (Business School, Pusan Natiional University)
Publication Information
Journal of Digital Convergence / v.18, no.6, 2020 , pp. 157-166 More about this Journal
Abstract
Firms perform various actions that affect management performance measurement by managing the volatility and capital cost of reported income through income smoothing. This study attempted to analyze with a focus on the relationship between managerial competence and income smoothing. Therefore, this study attempted to analyze and focus on the relationship between managerial competency and profit softening using a measure of managerial competency presented in Demerjian et al. (2012). The results of the analysis are as follows. It was confirmed that there was a significant positive relationship between manager ability and income smoothing at the 1% level. When managers make income, it can be interpreted that managers with superior ability can make profits better by accurately predicting the future. It is the same result as the expectation of this study that managers with excellent ability have high incentives to soften profits by reducing profit volatility through more accurate forecasting. Therefore, this study empirically analyzed that managers with excellent abilities are more effective in implementing income smoothing strategies.
Keywords
management ability; income smoothing; corporate performance; income management; Managerial Ability Hypothesis;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Park, J., C. Y. Ko, H. Jung, and Y. Lee. 2015. Managerial Ability and Tax Avoidance : Evidence from Korea. Asia-Pacific Journal of Accounting and Economics. March 2015(Online)"
2 Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225.   DOI
3 Moses, O. D. (1987). Income smoothing and incentives: Empirical tests using accounting changes. Accounting Review, 358-377.
4 Chaney, P. K., & Lewis, C. M. (1995). Earnings management and firm valuation under asymmetric information. Journal of Corporate Finance, 1(3-4), 319-345.   DOI
5 Kirschengeiter, and N.D. Melumad, "Earnings quality and smoothing", Working paper, University of Illinois at Chicago and Columbia University, 2007.
6 Trueman, B., & Titman, S. (1988). An explanation for accounting income smoothing. Journal of accounting research, 127-139.
7 Healy, P. (1985). The impact of bonus schemes on the selection of accounting principles. Journal of Accounting and Economics, 7(1-3), 85-107.   DOI
8 Holthausen, R. W., Larcker, D. F., & Sloan, R. G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of accounting and economics, 19(1), 29-74.   DOI
9 Gaver, J. J., & Gaver, K. M. (1998). The relation between nonrecurring accounting transactions and CEO cash compensation. Accounting Review, 235-253.   DOI
10 Beidleman, C. R. (1973). Income smoothing: The role of management. The Accounting Review, 48(4), 653-667.
11 Collins, D. W., Kothari, S. P., Shanken, J., & Sloan, R. G. (1994). Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association. Journal of Accounting and Economics, 18(3), 289-324.   DOI
12 Myers, J. N., Myers, L. A., & Skinner, D. J. (2007). Earnings momentum and earnings management. Journal of Accounting, Auditing & Finance, 22(2), 249-284.   DOI
13 Demerjian, P. R., Lev, B., Lewis, M. F., & McVay, S. E. (2012). Managerial ability and earnings quality. The Accounting Review, 88(2), 463-498.   DOI
14 Bowen, R. M., Rajgopal, S., & Venkatachalam, M. (2008). Accounting discretion, corporate governance, and firm performance. Contemporary accounting research, 25(2), 351-405.   DOI
15 Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2-3), 344-401.   DOI
16 Trueman, B., & Titman, S. (1988). An explanation for accounting income smoothing. Journal of accounting research, 127-139.
17 DeFond, M. L., & Park, C. W. (1997). Smoothing income in anticipation of future earnings. Journal of accounting and economics, 23(2), 115-139.   DOI
18 Baik, B., D. Farber, and S. Lee. 2011. "CEO Ability and Management Earnings Forecasts", Contemporary Accounting Research. 28, 1645-1668.   DOI
19 Malmendier, U., & Tate, G. (2009). Superstar ceos. The Quarterly Journal of Economics, 124(4), 1593-1638.   DOI
20 Trueman, B. (1986). Why do managers voluntarily release earnings forecasts?. Journal of accounting and economics, 8(1), 53-71.   DOI
21 Aier, J. K., Comprix, J., Gunlock, M. T., & Lee, D. (2005). The financial expertise of CFOs and accounting restatements. Accounting Horizons, 19(3), 123-135.   DOI
22 Bertrand, M., & Schoar, A. (2003). Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics, 118(4), 1169-1208.   DOI
23 Demerjian, P., Lev, B., McVay, S., 2013. Managerial ability and earning quality. The Accounting Review 88, 463-498   DOI
24 Chemmanur, T. J., & Paeglis, I. (2005). Management quality, certification, and initial public offerings. Journal of Financial Economics, 76(2), 331-368.   DOI
25 Holcomb, T. R., Holmes Jr, R. M., & Connelly, B. L. (2009). Making the most of what you have: Managerial ability as a source of resource value creation. Strategic management journal, 30(5), 457-485.   DOI
26 Barth, M. E., Elliott, J. A., & Finn, M. W. (1999). Market rewards associated with patterns of increasing earnings. Journal of Accounting Research, 37(2), 387-413.   DOI
27 Kasznik, R., & McNichols, M. F. (2002). Does meeting earnings expectations matter? Evidence from analyst forecast revisions and share prices. Journal of Accounting research, 40(3), 727-759.   DOI
28 Demerjian, P., Lewis-Western, M., & McVay, S. (2017). How does intentional earnings smoothing vary with managerial ability?. Journal of Accounting, Auditing & Finance, 0148558X17748405.
29 Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of accounting and economics, 22(1-3), 249-281.   DOI
30 Baik, B., S. Choi, D. B. Farber, Jingling Zhang. 2012. The Incentives for Tax Planning. Journal of Accounting and Economics. 53 (1-2), 391-411.   DOI
31 Falato, A., Li, D., & Milbourn, T. (2011). To each according to his ability? CEO pay and the market for CEOs. Unpublished working paper, Washington University in St Louis.
32 Acharya, V. V., & Lambrecht, B. M. (2015). A theory of income smoothing when insiders know more than outsiders. The Review of Financial Studies, 28(9), 2534-2574.   DOI
33 Graham, J. R., & Harvey, C. R. (2005). The long-run equity risk premium. Finance Research Letters, 2(4), 185-194.   DOI
34 Lambert, R. A. (1984). Income smoothing as rational equilibrium behavior. Accounting Review, 604-618.